An index fund buys the shares in a market index, such as the S&P 500 of large US companies. You can own one in two forms. A mutual fund is bought from the fund company once a day. An exchange-traded fund (ETF) is bought on a stock exchange whenever it is open.
Vanguard's 500 Index Fund comes in both forms. VFIAX is the mutual fund. VOO (Vanguard's S&P 500 ETF) is the ETF. Both hold the same shares. Over the ten years to September 2026, each returned 15.29% a year before tax. Here is what the form changes, shown with that Vanguard pair.
Index funds vs ETFs: what is the difference? An index fund is any fund that tracks a market index. It can be a mutual fund, bought from the fund once a day at its closing value. Or it can be an exchange-traded fund (ETF), traded on a stock exchange all day.
Vanguard sells its S&P 500 fund in both forms. Over the ten years to September 2026, the mutual fund and the ETF each returned 15.29% a year before tax.
The mutual fund needs $3,000 to start. At Vanguard, you can start in the ETF with $1. Elsewhere, you may need the price of one share.
In an ordinary taxed US account, ETFs usually hand investors fewer taxable profits from selling holdings. These payouts are called capital gains distributions.
Are index funds and ETFs the same?
The two terms answer different questions. "Index fund" describes what a fund holds: the shares in an index, in the index's own weights. Our guide to what an index fund is explains how they track and what they cost. "ETF" describes how you buy a fund: on a stock exchange, like a share. What Is an ETF? explains how that works.
So the two overlap, as do index funds and mutual funds. There are four kinds of fund:
Index mutual funds, such as VFIAX.
Index ETFs, such as VOO.
Actively managed mutual funds, where a manager picks the holdings.
Actively managed ETFs.
The form a fund is sold in is often called its wrapper. This guide compares index funds in their two wrappers.
Index mutual funds vs index ETFs: assets since 1993
Source: Investment Company Institute, 2026 Fact Book (Tables 11 and 42); YX Insights
Chart 1 uses year-end figures from the Investment Company Institute (ICI), the US fund industry body. Index mutual funds came first. At the end of 1993 they held $27.8 billion, against $464 million in index ETFs. Index ETFs overtook them at the end of 2020, with $5.13 trillion against $4.84 trillion. By the end of 2025, index ETFs held $11.6 trillion. Index mutual funds held $7.7 trillion.
One fund, two wrappers: VFIAX vs VOO, side by side
Vanguard 500 Index Fund sells several share classes. A share class is one version of a fund. Every class owns the same holdings, while each has its own fee, minimum and price. Admiral Shares (VFIAX) are a mutual fund class. ETF Shares (VOO) "trade throughout the day like individual stocks", says Vanguard.
The table puts them side by side. NAV is the net asset value: the value of the fund's holdings, minus what it owes, per share.
VFIAX (mutual fund) | VOO (ETF) | |
|---|---|---|
How you buy | From the fund, at the next NAV | On a stock exchange, at the market price |
Price on 2 October 2026 | $712.69 (NAV) | $707.54 (market price) |
Minimum first investment | $3,000 | $1 at Vanguard; one share where fractions are not offered |
Yearly fee | 0.04% | 0.03% |
Started | November 2000 | September 2010 |
Average yearly return, ten years to 30 September 2026 | 15.29% | 15.29% |
Capital gains paid out, last six payouts | None (dividends only) | None (dividends only) |
Source: Vanguard
Each share class has its own price per share. So the two prices in the table cannot be compared directly.
Source: Vanguard; YX Insights
Chart 2 shows the average yearly return of each share class over 1, 3, 5 and 10 years, before tax, next to the S&P 500. A percentage point is the plain gap between two percentages: 5% and 6% are one point apart. In every period, the two classes were within 0.01 percentage points of each other. Both trailed the S&P 500 by 0.04 to 0.05 points a year, close to their fees. The holdings are the same, so the return is the same, minus the fee.
Trading: once a day vs all day
US mutual funds must price their shares each business day, according to the US Securities and Exchange Commission (SEC). Vanguard says mutual funds are priced at the end of the trading day, typically around 4 p.m. New York time. Every order is filled at the next price set. A VFIAX order placed at 11 a.m. New York time gets the NAV worked out after that day's close.
An ETF trades whenever its exchange is open. A VOO order placed at 11 a.m. is filled at the market price at 11 a.m. VOO's market price can sit slightly above or below VOO's own NAV. Each ETF trade also crosses the bid-ask spread: buyers pay the ask price, while sellers get the lower bid price. What Is an ETF? shows how close one ETF's price stays to its holdings. What Does a Market Maker Do? explains the spread.
Minimums and fees: $3,000 vs $1 to start
VFIAX needs $3,000 to open. Vanguard sells its ETFs from $1, according to its website. Where an investment platform deals only in whole shares, the minimum is the price of one: $707.54 for VOO on 2 October 2026.
The fee is set fund by fund. On $10,000, VFIAX's 0.04% fee is $4 a year. VOO's 0.03% fee is $3 a year. For this pair, the ETF is a little cheaper.
Across the whole market, the ranking flips. In 2025, index mutual funds holding shares charged an average of 0.05% a year, according to the ICI. Index ETFs holding shares charged 0.14%. Both averages give more weight to bigger funds. So check each fund's own fee.
Tax: fewer capital gains payouts from ETFs
When a US fund sells holdings at a profit, it passes the gain on to its investors as a capital gains distribution. The Internal Revenue Service (IRS) taxes these at its long-term capital gains rate. That applies however long you have held the fund. The tax is due in the year of the payout, even if you sold nothing. Mutual funds paid out $740 billion of capital gains in 2025. That year, 67% of mutual funds that hold shares made such a payout, according to the ICI. Each share class was counted separately.
ETFs pay out fewer. When an ETF shrinks, it can hand over shares from its portfolio instead of selling them. That moves gains out of the fund without a sale. The SEC says many ETFs "typically have fewer capital gain distributions than mutual funds" as a result.
In the Vanguard pair, both classes share one portfolio. Neither paid a capital gains distribution in its last six payouts, from July 2025 to September 2026. After tax on payouts, on Vanguard's own measure, both returned 14.83% a year over the ten years.
The point only matters in an ordinary taxed account. Payouts inside a US individual retirement account (IRA) are not taxed as they arrive, as the prospectus of SPY (the S&P 500 ETF) notes. In the UK, you pay no tax on income or capital gains from investments in an Individual Savings Account (ISA), according to the UK government's ISA guidance. Outside an ISA, dividends can be taxed, as How Are Dividends Taxed? explains.
Which should you choose? What to check
The right wrapper depends on how you invest. A few checks help:
The index. Two funds tracking the same index should return almost the same, before fees.
The minimum. Some mutual funds ask for a set amount to start. An ETF can need the price of one share, unless the platform deals in fractions.
The fee. Read it on the fund's own page. It is set fund by fund.
Trading costs. For an ETF, check the bid-ask spread and how far the price strays from the NAV.
The account. Inside an ISA or an IRA, the capital gains difference falls away.
An index mutual fund and an index ETF can hold exactly the same shares, as VFIAX and VOO do. Their returns then differ by little more than the fee. The wrapper changes how you trade and the minimum. In an ordinary taxed account, it can change the tax too.
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