Passive investing through ETFs and Index funds has soared in popularity, and with good reason. It offers a low-cost, hands-off way to track markets. But when choosing between ETFs and index funds, it’s important to understand the key differences.
“There’s been a huge shift towards passive investing in recent years,” says Danielle Farley, passive investment analyst at Hargreaves Lansdown. “In 2024, European passive funds saw record inflows of €307.6 billion — more than double that of active funds. So, it’s no surprise that ETFs and index funds are being compared more than ever.”
Why choose ETFs?
ETFs (Exchange-Traded Funds) can be bought and sold throughout the trading day, which offers flexibility for those who want to react quickly to market moves. “ETFs disclose holdings daily and use in-kind transfers, which helps keep costs and tax liabilities down,” explains Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown. However, she cautions: “Trading costs and bid-offer spreads can eat into returns if you’re not careful.”
Why choose index funds?
Index funds are typically bought once a day at a single valuation point and don’t involve trading fees. “They’re a great option for long-term investors who want simplicity,” adds Danielle Farley. “You don’t get daily transparency, but many investors value that simplicity over granularity.”
Which is cheaper?
ETFs can be cheaper if you’re investing a lump sum and comfortable trading over time due to lower ongoing charges.
Index funds are cheaper f you’re investing monthly or prefer simplicity, as they are usually better value because there are no trading fees and they suit regular contributions.
| Cost Type | ETFs | Index Funds |
| Ongoing Charges | Typically lower (e.g. 0.07%–0.25%) | Slightly higher (e.g. 0.10%–0.35%) |
| Dealing Charges | Yes – brokerage fees apply per trade | No – usually free to buy/sell on platforms |
| Bid/Offer Spread | Yes – small hidden cost on each trade | No – one daily price |
| Platform Charges | May vary depending on the broker | May be cheaper if no dealing is needed |
On Hargreaves Lansdown, here’s a rough idea of costs:
iShares FTSE 100 ETF (ISF):
- Ongoing charge: ~0.07%
- Dealing cost: £11.95 per buy/sell
- Bid/offer spread: ~0.05–0.10%
Legal & General UK 100 Index Fund:
- Ongoing charge: ~0.10%
- No dealing cost
- No bid/offer spread
Which performs better?
When it comes to performance, ETFs and index funds are both designed to track an index, not beat it — so neither consistently outperforms the other. However, minor differences can occur due to structure and costs. ETFs often have lower ongoing charges (e.g. 0.07% for iShares FTSE 100 ETF) and use in-kind transfers to reduce tax and trading inefficiencies, which can lead to better tracking accuracy.
“ETFs are generally more tax efficient, which can improve net performance, especially in jurisdictions like the US,” says Danielle Farley, Passive Investment Analyst at Hargreaves Lansdown. In contrast, index funds may have slightly higher ongoing fees (e.g. 0.10% for Legal & General UK 100 Index Fund), but typically avoid dealing charges and bid-offer spreads, which helps long-term investors retain more of their returns.
Over the long run, index funds can perform just as well, or even better, than ETFs, depending on how they are used. ETFs may suit cost-conscious, more active investors who trade lump sums or want daily flexibility, while index funds work well for regular savers using monthly contributions.
“In theory, ETFs should perform better than equivalent index funds,” adds Farley, “but in practice, results depend on how the fund is managed, platform charges, and how you use it.” Ultimately, both are viable options for passive investing, but the better performer for you will depend on your strategy, trading frequency, and fee structure.
So which is better?
In theory, ETFs have cost advantages, but real-world performance depends on how well each product tracks the index and manages fees. “Ultimately, it comes down to individual preference and how you invest,” says Farley. “ETFs suit active traders; index funds are often best for buy-and-hold investors.”
Top passive picks from Hargreaves Lansdown:
- Legal & General UK 100 Index Fund
- iShares FTSE 100 ETF
- Vanguard Global Bond Index Fund
- Vanguard Global Aggregate Bond ETF
All offer broad, low-cost exposure, ideal for building a passive portfolio.
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