Index Funds vs ETFs: What’s Best for UK Investors?
Both index funds and ETFs (exchange-traded funds) offer a low-cost, hands-off way to invest, and both are popular among UK investors looking for long-term growth. But while they’re similar, they’re not quite the same.
This guide explains the key differences, advantages, and how to choose between them based on your investment goals.
What Is an Index Fund?
An index fund is a type of mutual fund that aims to match the performance of a market index, like the FTSE 100 or S&P 500. You buy or sell it once per day at the fund’s price (NAV), and it’s managed by a provider like Vanguard, Fidelity, or HSBC.
What Is an ETF?
An ETF is a type of investment fund that also tracks an index, but unlike a traditional index fund, it's traded on stock exchanges just like shares. You can buy and sell ETFs throughout the day, and prices change in real time.
Key Differences Between Index Funds and ETFs
| Feature | Index Fund | ETF |
|---|---|---|
| Trading | Once per day (end of day NAV) | Any time during market hours |
| Access | Ideal for regular direct debit investing | Better for lump sums and DIY investors |
| Fees | Usually slightly higher | Often slightly cheaper |
| Flexibility | Less flexible — can't trade instantly | High flexibility — live pricing |
| Where to Buy | Via investment platforms like Vanguard, AJ Bell | Via online brokers like Freetrade, Trading 212 |
Which Performs Better?
Performance is nearly identical if the funds track the same index — the difference comes down to:
- Fees (even 0.1% matters over decades)
- Platform costs or transaction fees
- How you buy (monthly investing vs lump sums)
When to Choose an Index Fund
- You want to set up a simple monthly investment via direct debit
- You don’t care about live pricing or trading flexibility
- You prefer a more passive, "set and forget" approach
When to Choose an ETF
- You want full control and flexibility
- You’re comfortable using a stock trading app or broker
- You want to avoid minimum investment amounts
Can You Hold Them in an ISA or Pension?
Yes, both index funds and ETFs can be held inside a Stocks & Shares ISA or a pension (like a SIPP), which means no capital gains tax or dividend tax on returns.
Final Thoughts
Index funds and ETFs are both excellent tools for long-term investing. If you prefer a simple, automated approach, index funds are ideal. If you want more control, lower fees, and live pricing, ETFs may be the better choice.
Whichever you choose, the most important step is to get started, and stay invested for the long term.