what is the difference between an index fund and an ETF (Exchange Traded Fund)?

Answer 1

They aren't necessarily different things.

An index fund is a fund which has an underlying portfolio designed to track a popular index, like the Nasdaq 100 or S&P 500. If you invest in an index fund, you will have gains or losses which reflect the percentage movement in the underlying index.

An exchange traded fund is exactly what it's name implies: it's shares are listed and traded on a stock exchange. This is different from traditional mutual funds, which are sold by dealers. The advantages of exchange traded funds are:

- liquidity...you can always sell them on the exchange
- market pricing...traditional mutual funds are priced once a day, at market close. ETF's are priced continuously throughout the day.
- No loads or termination fees. You pay simple commissions, just like a stock
- Low expense ratio, because the number of shares is fairly constant.
- In theory, they can be short sold and margined, just like stock.