ETF vs index fund: the differences that actually matter
Guide contents
1. The short answer
Both track an index at low cost. An ETF is bought and sold on a stock exchange at a live price, through a broker. An index fund is bought directly from the fund at the end-of-day net asset value, through a fund distributor. In Spain, the decisive difference is tax: you can switch between funds without paying tax (traspaso), but not between ETFs.
2. Side by side
| Aspect | Index ETF | Index fund |
|---|---|---|
| Where you buy it | Stock exchange, via a broker | From the fund, via a fund distributor or bank |
| Price | Live, during market hours | Once a day (net asset value) |
| Typical annual cost (TER) | 0.03%–0.30% | 0.05%–0.30% for the cheap classes |
| Buying cost | Broker commission + spread | Usually none |
| Automatic monthly contributions | Depends on the broker | Yes, almost always |
| Tax-free switching in Spain (traspaso) | No: selling triggers tax on gains | Yes, between eligible funds |
Cost ranges are indicative for the main world and US index products; each product page in the catalogue lists its own figure.
3. Tax-free switching (the Spanish case)
In Spain, moving money from one investment fund to another through a traspaso does not trigger tax: the gain is deferred until you finally sell. This also applies to foreign UCITS funds registered with the CNMV, subject to conditions. ETFs are excluded from this regime: if you sell one ETF to buy another, you pay tax on the gain that year.
Over decades this matters: rebalancing, changing strategy or moving to a cheaper fund can be done without handing part of the gain to the tax office along the way.
4. When each one makes sense
- Index fund: you contribute monthly, you expect to rebalance or switch products over time, and you invest from Spain.
- ETF: you want an index or share class no fund offers, you invest large lump sums rarely, or you value trading at a live price.
- Both: many investors hold an index fund for regular contributions and an ETF for exposure that has no fund equivalent, such as the Nasdaq-100.
5. Same index, compare like with like
The most common mistake is comparing an ETF on one index with a fund on another. First choose the index, then compare the options on it. Our catalogue does exactly that for the MSCI World, the S&P 500 and the Nasdaq-100.
And if you end up holding both — funds at one platform, ETFs at a broker — FinBoard shows them together, in one currency, so you see your real exposure to each index instead of two partial pictures.
This is educational content, not financial advice: it explains concepts so you can make your own decisions, and it does not recommend any specific product or allocation.
Frequently asked questions
Which is cheaper, an ETF or an index fund?
On the same index, the cheapest ETF usually has a slightly lower TER than the cheapest fund, but the ETF adds broker commissions and spread. For small monthly contributions the fund often ends up cheaper in total; for large, infrequent purchases the ETF usually wins.
Can I switch from an ETF to an index fund without paying tax?
Not in Spain: the traspaso regime does not cover ETFs, so selling the ETF realises the gain. The reverse is also taxed. The tax-free switch only works between eligible investment funds.
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