ETFs Vs. Index Funds: Quantifying The Differences

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Given the increased popularity of exchange-traded funds (ETFs), you would think that index investors have fallen in love with this investment vehicle. Even though ETFs have only been around since 1993 (whereas the first index mutual fund was introduced in 1975), by the end of 2004 their total net assets amounted to almost half those of index funds (see Table 1). However, a closer look shows that index funds are still the top choice for the majority of retail index investors. Here we will look at the reasons why ETFs have become so popular and analyze whether they make sense - from a cost, size and time-horizon standpoint - as an alternative to index funds.

Table 1 - Comparison of types of funds

Many articles have been written comparing ETFs to index funds, but not much has been written on quantifying the differences to determine when one makes sense over the other.
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