What is the difference between an index fund and an ETF?

The main difference is how you buy them. Index funds are bought once per day at end-of-day prices directly from the fund company. ETFs trade on stock exchanges throughout the day like regular shares. Both track the same underlying investments.

Are ETFs better than index funds?

Neither is inherently better. ETFs offer real-time trading and often lower fees, while index funds are simpler with automatic reinvestment. For most beginners, the difference is minimal - choose whichever is cheaper on your platform.

What is a good ETF for beginners in the UK?

For UK beginners, a global index ETF like Vanguard FTSE All-World (VWRL) offers instant diversification across 3,700+ companies worldwide. It's low-cost (0.22%), simple, and gives exposure to all major markets in one fund.

Index Funds vs ETFs: What's the Difference?

Q: Do ETFs pay dividends?

Yes, ETFs can pay dividends. Distributing ETFs pay dividends to your account, while accumulating ETFs automatically reinvest them. For long-term investors, accumulating ETFs are more convenient and slightly more tax-efficient.

If you've started looking into investing, you've probably seen people argue about "index funds vs ETFs". Good news: they're almost identical. Here's what actually matters.

🎯 The Short Answer

Both track a basket of stocks (like the FTSE 100 or S&P 500). The only real difference is how you buy them. Index funds are bought once per day; ETFs trade like shares throughout the day. For most beginners? It doesn't matter. Pick whichever is cheaper on your platform.

What Are They, Actually?

📊 Index Fund

A mutual fund that tracks an index (like the FTSE 100). You buy it directly from the fund company.

Priced once per day
Buy/sell at end-of-day price
Example: Vanguard FTSE Global All Cap Index Fund

📈 ETF (Exchange-Traded Fund)

An index fund that trades on the stock exchange like a regular share.

Priced constantly throughout the day
Buy/sell any time markets are open
Example: Vanguard FTSE All-World ETF (VWRL)

The Real Differences

	Index Fund	ETF
How you buy	From fund company	On stock exchange
Trading	Once per day (4pm)	Any time markets open
Price	Fixed at day end	Fluctuates all day
Minimum	Usually £1 or £100/month	Price of 1 share (or fractional)
Trading fees	Usually none	Depends on broker
Holdings	Published monthly	Published daily

That's it. Those are the differences. Underneath, they often hold exactly the same investments.

📌 Real Example

Vanguard offers both:

Index Fund: FTSE Global All Cap Index Fund — 0.23% fee
ETF: FTSE All-World ETF (VWRL) — 0.22% fee

Both track global stock markets. Both are from Vanguard. The ETF is 0.01% cheaper. That's the kind of difference we're talking about.

Which Should You Choose?

✅ Go with an Index Fund if:

You invest monthly (set it and forget it)
You don't want to think about trading
Your platform offers them with no fees
You're using Vanguard directly

✅ Go with an ETF if:

You want to buy/sell at specific times
Your platform has commission-free ETFs
You want fractional shares (Trading 212)
You want to see real-time prices

🤷 Honestly?

For Zo's portfolio, we use the Vanguard FTSE All-World ETF (VWRL) because:

Trading 212 offers it
Zero trading fees
Fractional shares (we can buy exactly £250 worth)
Low fee (0.22%)

But if we were using Vanguard directly, we'd probably use their index fund version. The difference is that small.

What About "Active" Funds?

Index funds and ETFs are passive — they just track an index. No one is picking stocks.

Active funds have a fund manager trying to beat the market. Sounds good, but:

Most active funds underperform the market over 10+ years
They charge higher fees (0.5-1.5% vs 0.1-0.3%)
Those fees compound against you

Our take: For most people, passive index funds/ETFs are the smarter choice. Let the market do the work.

Common Indexes You'll See

🌍 FTSE All-World

~3,700 companies globally. The "buy the whole world" option.

ETF: VWRL

🇬🇧 FTSE 100

100 largest UK companies. UK-focused.

ETF: VUKE

🇺🇸 S&P 500

500 largest US companies. Heavy tech exposure.

ETF: VUSA

📈 Global Small Cap

Smaller companies globally. Higher risk/reward.

ETF: VWRL already includes some

Our pick: FTSE All-World (VWRL) gives you everything in one fund — US, UK, Europe, Asia, emerging markets. Simple diversification.

Quick FAQ

Are ETFs riskier than index funds?

No. They carry the same investment risk (both track the same underlying stocks). The only difference is how they're traded.

Can I have both in my portfolio?

Yes. Some people use index funds for core holdings and ETFs for specific sectors. But for beginners, one global index fund/ETF is enough.

Do ETFs pay dividends?

Yes. Most ETFs either pay out dividends (distributing) or reinvest them automatically (accumulating). Accumulating is easier — no need to reinvest yourself.

What's an accumulating ETF?

An ETF that automatically reinvests dividends. VWRL is distributing (pays out), but Vanguard also offers accumulating versions like VWCE. For long-term investing, accumulating is slightly more tax-efficient and hands-off.

See What We Actually Hold

Our portfolio is 70% in one ETF. See the full breakdown.

View Our Portfolio Compare Platforms

Important: This is not financial advice. We're sharing what we've learned. All investing involves risk. Do your own research before investing.