ETF vs Index Fund: Confusion and Clarification

On the internet I saw many times ETFs are explained in such way: “ETF is a fund tracking an index…” or “ETF has tracking error risk…”. In fact, these are not the truth. ETFs are not always tracking indices. The name ETF itself focuses on its tradability feature, it may or may not track an index. Meanwhile, “Index fund” is another frequently quoted name, it may refer to either ETF or mutual fund. I’d like to use a simple chart to clarify the relationship between ETF and Index Fund.


1, Indexed based ETF. Many ETFs track the performance of specific market indecis, such as SPY and QQQ. Some other ETFs use multiples, inverse, or even multiple inverse of index performance. Some ETF providers are very good at providing those kind of products, such as Direxion and Horizion.

2, Actively managed ETF. This kind of ETF emerged in 2008 in the United States as SEC provide regulatory relief. The fund companies are required to provide detailed holding information on their webisite on the daily basis. Here is a list of BMO’s non-index ETFs:

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3, Index mutual funds. In Canada, Many asset managers have their own index mutual funds. For example, RBC has U.S. Index Funds (fund code RBF557), TD has U.S Index Fund (code TDB661), BMO has U.S. Dollar Equity Index Fund (code GGF70803), all of these three funds are trying to replicate the performance of S&P500 Total Return Index ($CAD). These funds can be sold in branches, clients not necessarily have brokerage accounts.

Even though an ETF and an index mutual fund are tracking a same index, their performace may vary substantially. This is mainly because of the transaction nature differences of two types of funds.

4, Ordinary mutual funds. Comparing with the above three types of funds, ordinary mutual funds (or actively managed mutual funds) generally have the lowest transparency and highest management fees.

Abstract in Chinese / 中文摘要