How ETFs and index funds intersect

"You can purchase broad market funds, tied to the S&P 500 Index, or narrower ones, that provide a lower risk profile focused on dividend-paying companies," said Todd Rosenbluth, head of research at VettaFi.

While many ETFs track an underlying index like the S&P 500, Rosenbluth explained there are many more targeted ETFs focused on companies that demonstrate growth traits or pay dividends. In contrast, index mutual funds tend to focus on just broad market exposure. With ETFs, investors can better tailor their portfolios to fit their risk profile.

"This is a deeper conversation and there is a lot of research regarding index funds versus ETFs," he said.HOW ETFS ALLOW YOU TO DABBLE IN THE HOUSING SECTOR WITHOUT A HEFTY INVESTMENT "An index fund is a broad-based basket of securities tied to ‘an index’ that is either proprietary and unique or commonly known – like the S&P 500," Auerbach continued. "The key is active versus passive and when the portfolio is rebalanced."Greg McBride, Bankrate’s chief financial analyst, explained that an index fund can be a mutual fund or ETF.

"The ETF version tends to have lower expenses and with the proliferation of commission-free trading, is increasingly the preferred vehicle for individual investors," he said.

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