While an index fund and a mutual fund may appear identical on the surface, there are numerous key differences between them that might be vital to your retirement portfolio. Both index funds and mutual funds diversify assets, and they are typically invested in a basket of stocks that aims to meet certain investment goals.

Overview of Index Funds

An index fund tracks a certain list of securities, such as the Dow Jones Industrial Average or S&P 500 indexes, based on certain criteria. The Dow Jones index tracks 30 blue-chip (some of the largest companies in the country that are important to the United States economy) industrial and financial companies in the United States. The index is used by the media to gauge the economy and stock market as a whole.^[1] There are many other indexes that track different stocks or securities and have different criteria for companies to get added or dropped from them.

An index fund is an investment product that offers you the opportunity to buy a basket of stocks that tracks an index. Index funds may hold stocks tracked on an index, but often vary in how each stock is weighted. Sectors or stocks may be screened out or favored in certain technical or fundamental ways to achieve a specific investment goal.

Overall, Index funds simply track the market in some form or another with less of a focus on “beating” the market.

Mutual Funds Are Different Than Index Funds

An investment manager can select a variety of securities to invest in via mutual funds. Index funds are often less costly than mutual funds, but they offer a wider range of opportunities. In addition, a mutual fund’s objective is often to meet a specific investment goal and outperform the market. Many popular mutual funds do simply track market indexes; however, they are not simply ETFs. Mutual funds, to some degree, are more actively managed than some ETFs, whereas index ETFs are passively managed, altering only based on stock indexes, not manager decisions.^[2]

In general, index funds can come in the form of mutual funds, but mutual funds come with additional benefits such as more asset diversity, different costs, and more. In general, mutual funds are a different investment product all together.

This conversation merely scratches the surface of the differences between index funds, mutual funds, ETFs, and more. If you’re interested in optimizing your retirement to fit your financial goals, sign up for a complimentary review with us today.