Mutual Funds, Index Funds, and ETFs: Costs and Key Differences

A mutual fund pools money from many investors. An index fund follows a rules-based market index. An ETF is an investment wrapper that trades on an exchange.

Those labels answer different questions. "Index" describes the strategy. "Mutual fund" and "ETF" describe the wrapper. A mutual fund can be active or indexed. An ETF can also be active or indexed.

Before buying, compare the strategy, holdings, expense ratio, sales load, share class, trading cost, tax treatment, tracking, diversification, and how easily you can invest on schedule.

What is a mutual fund?

A mutual fund is an investment company that pools shareholder money and invests it under a stated objective. Investors buy redeemable shares from the fund or through a broker. Orders generally settle at the next calculated net asset value, or NAV, after the fund receives them.

A mutual fund can hold stocks, bonds, cash instruments, or a mix. It can follow an index or pay a manager to choose holdings.

The word mutual fund does not tell you whether the fund is:

active or indexed;

broad or concentrated;

cheap or expensive;

sold with a load or no load;

tax efficient; or

a good fit for the account.

Read the prospectus and latest shareholder report. The fund name is the front label, not the full ingredient list.

What is an index fund?

An index fund seeks to track the performance of a selected market index before fees and tracking differences.

The index can cover:

large U.S. companies;

the total U.S. stock market;

international stocks;

government or corporate bonds;

one sector;

a factor such as value or small size; or

a narrow theme.

The fund does not own "the whole market" unless its index is designed that way. A narrow index fund can be concentrated and risky.

What is an ETF?

An exchange-traded fund, or ETF, pools investor money and holds assets under a stated strategy. ETF shares trade on an exchange during the day.

An ETF can be:

an index fund;

actively managed;

broad and diversified;

narrow and concentrated;

stock, bond, commodity, or multi-asset; or

simple or complex.

The ETF label alone does not tell you whether the fund is low cost, diversified, tax efficient, or appropriate.

An index is the strategy; a mutual fund or ETF is the wrapper. Definitions come from Investor.gov's index-fund glossary and fund guides.

Index fund vs. ETF: the key differences

Many searches for "ETF vs index fund" are really comparing an index mutual fund with an index ETF.

Feature | Index mutual fund | Index ETF
Pricing | Usually once daily at net asset value | Trades during the day at market prices
Orders | Dollar purchases are common | Share or fractional-share orders depend on broker
Automatic investing | Often simple at the fund company | Broker-dependent
Minimum | Fund or account may set one | Usually price of a share or fractional minimum
Trading spread | No bid-ask spread for the investor | Bid-ask spread can add cost
Premium or discount | Bought and sold at NAV | Market price can differ from NAV
Tax efficiency | Structure and portfolio activity matter | In-kind process can reduce some distributions, but not always

The best wrapper is the one that makes the intended strategy easy to hold at a low total cost.

Mutual fund vs. index fund is the wrong first question

An index fund may be organized as a mutual fund. That makes "mutual fund vs. index fund" like asking "car vs. electric." One term names the container and the other names how it works.

Ask two separate questions:

Is the strategy active or index-based?

Is the wrapper a mutual fund or ETF?

An active mutual fund pays a manager to select investments under the prospectus. An index mutual fund seeks to track an index. Neither result is guaranteed. Active managers can underperform, and an index fund can track a falling or badly concentrated market.

S&P 500 index funds are not the whole market

An S&P 500 index fund tracks a large-company U.S. stock index. It does not include every U.S. company, small companies, international stocks, or bonds.

An S&P 500 ETF uses the ETF wrapper to track that index. Multiple funds can follow the same index while charging different fees, trading at different spreads, lending securities differently, or tracking with small differences.

The S&P 500 can be a broad large-company holding. It is not a complete description of every investor's diversification.

How to compare low-cost index funds

The phrase "best index funds" is useful only after the job is defined.

Use this order:

Name the asset class or market exposure needed.

Read the index methodology.

Check the fund's actual holdings and concentration.

Compare the expense ratio.

Check bid-ask spread and premium or discount for an ETF.

Review tracking difference, not just the stated fee.

Check turnover and distribution history.

Confirm minimums and automatic-investing options.

Read securities-lending and derivative disclosures.

Check whether the fund fits the account's tax treatment.

A fund-comparison checklist based on SEC and Investor.gov fund guidance. It ranks fit and cost, not brands.

Why the expense ratio matters

The expense ratio is the percentage of fund assets used for annual operating expenses. It is taken inside the fund, so you may never see a separate bill.

Small annual differences compound. The SEC has shown how fees reduce a hypothetical $100,000 investment over 20 years even when the before-fee return is the same.

The SEC's published fee example shows why low-cost index funds deserve a full-cost comparison. It is an illustration, not a return forecast. See the Investor.gov fee bulletin.

The expense ratio is not the only fund cost.

In the prospectus, look for Total Annual Fund Operating Expenses. That percentage is commonly called the expense ratio or total expense ratio. Check whether a temporary fee waiver makes the current net figure lower than the longer-run gross figure.

A front-end load comes out when shares are bought.

A deferred sales load may apply when shares are sold.

A 12b-1 fee pays certain distribution or shareholder-service costs from fund assets.

An account or redemption fee may apply to a specific action.

An advice or wrap fee may sit outside the fund.

Trading, tax, and underlying fund costs can matter even when they do not appear in one headline number.

"No-load" means no sales load. It does not mean no fees.

The SEC mutual-fund and ETF fee bulletin explains why the prospectus fee table is only the starting point.

What do mutual funds cost now?

The Investment Company Institute reported these asset-weighted average expense ratios for 2025. Asset-weighted means larger investor balances have more influence on the average.

These are market-wide averages, not quotes for a fund. ICI reported 0.40% for equity mutual funds, 0.14% for index equity ETFs, 0.36% for bond mutual funds, and 0.09% for index bond ETFs in 2025.

Do not use the average as permission to overpay. Compare funds that do the same job. A global small-company fund and a plain U.S. large-company index fund are not fair twins.

Mutual fund share classes can change the bill

Different share classes can own the same portfolio while charging investors differently.

One class may take a front-end load. Another may have a deferred load. A third may have a higher ongoing expense. The cheapest class depends on eligibility, holding period, account, breakpoint discounts, and whether an adviser charges separately.

Ask:

Which share classes can I buy?

What dollar or household breakpoint reduces the load?

Is the adviser paid by the load, a trail, or another fee?

Is a lower-cost class available through another account?

What will I pay in dollars over the time I expect to hold it?

The SEC warns that owning a different class of the same fund can produce a different return because the costs differ.

Risks that do not disappear

Index investing removes the need to pick every security. It does not remove:

market risk;

concentration risk;

interest-rate and credit risk in bond funds;

tracking error;

liquidity and spread risk;

tax cost;

poor investor timing; or

the risk of choosing the wrong index for the goal.

A sector index can fall harder than a broad market. A bond index fund can lose money when rates rise or credit conditions weaken. A leveraged or inverse ETF can behave very differently from a plain long-term index fund.

Are index funds better than active funds?

Low cost, broad diversification, and clear rules are strong advantages. Active management can differ in cost, concentration, tax, risk, and outcome.

S&P Dow Jones Indices reported that 79% of active large-cap U.S. equity funds underperformed the S&P 500 in 2025. That one-year result does not prove that every active fund will always lose, and it does not turn the S&P 500 into the right benchmark for every strategy.

Compare a fund with the benchmark and job it actually claims.

Common questions

Are all ETFs index funds?

No. ETFs can be indexed or actively managed. Read the stated strategy and holdings.

Are all index funds low cost?

No. Fees vary, and a low expense ratio does not capture ETF spreads, commissions, taxes, advice fees, or tracking differences.

Is an S&P 500 index fund good for beginners?

It can provide diversified exposure to large U.S. companies, but it leaves out small U.S. companies, international markets, and bonds. A beginner still needs an asset-allocation and account plan.

Is an ETF better than a mutual fund?

Not automatically. ETFs offer intraday trading and can be tax efficient. Mutual funds can make dollar-based automatic investing simpler. Compare the exact funds and broker.

Are mutual funds safe?

They are securities, not insured bank deposits. Risk depends on the holdings and strategy. A government-bond fund can lose value, and a stock fund can fall sharply.

What is a good mutual fund expense ratio?

There is no one good number for every strategy. Compare the exact fund with close rivals. Low-cost mutual funds should still be checked for loads, advice fees, account charges, trading, tax, and tracking.

Are no-load mutual funds free?

No. No-load means the fund does not charge a sales load. Operating expenses and other costs can still reduce returns.

What are the best index funds for beginners?

Start with the needed exposure, then compare broad diversification, low total cost, simple holdings, tracking, minimums, and automation. A brand list without a current method is not a reliable answer.

This guide is general education, not a fund recommendation. Fund fees, holdings, tax results, premiums, discounts, and trading conditions change. Read the current prospectus.

Sources

Investor.gov, index fund definition. Accessed July 30, 2026.

Investor.gov, index funds. Accessed July 30, 2026.

Investor.gov, mutual funds. Accessed July 30, 2026.

Investor.gov, exchange-traded funds. Accessed July 30, 2026.

Investor.gov, mutual-fund and ETF fees and expenses. Accessed July 30, 2026.

Investor.gov, updated fund fee bulletin. Accessed July 30, 2026.

Investor.gov, asset allocation and diversification. Accessed July 30, 2026.

FINRA, exchange-traded funds and products. Accessed July 30, 2026.

S&P Dow Jones Indices, SPIVA U.S. Year-End 2025. Accessed July 30, 2026.

SEC, EDGAR company filings. Accessed July 30, 2026.

Investor.gov, Mutual Fund and ETF Fees and Expenses. Accessed July 31, 2026.

Investor.gov, Mutual Fund Classes. Accessed July 31, 2026.

Investor.gov, How to Read a Mutual Fund Prospectus Fee Table. Accessed July 31, 2026.

Investment Company Institute, 2025 Fund Fee Trends. Accessed July 31, 2026.

FINRA, Using the Fund Analyzer. Accessed July 31, 2026.