What are Index Funds?

Index funds are a type of mutual fund designed to track the performance of a market index, including, for example, the FTSE 100, S&P 500 or MSCI World. Rather than trying to beat the market through active management, index funds aim to mirror the returns of the index they follow.

For UK investors, this makes them a cost-effective and low-maintenance way to gain exposure to broad swathes of the market. Index funds are priced once daily, with units bought or sold at the net asset value (NAV) calculated at market close. They are ideal for long-term investors who prefer a ‘set it and forget it’ strategy, especially those with limited interest in the markets.

What are ETFs?

ETFs (exchange-traded funds) are similar to index funds in that they also aim to track a market index. However, ETFs are traded like individual shares on a stock exchange and their prices fluctuate throughout the day, giving investors the flexibility to buy or sell at any time during trading hours.

In the UK, ETFs are often structured as UCITS funds, providing investor protections and regulatory oversight — meaning they can be held in a Stocks & Shares ISA, SIPP or general investing account. ETFs can cover everything from global equities to bonds, commodities and thematic sectors.

How to invest in Index Funds and ETFs with us

For those looking invest in Index Funds and ETFs with us, here's a straightforward approach:

1. Learn more about Index Funds and ETFs
2. Download the IG Invest app or open a share dealing account online
3. Search for your desired Index Funds or ETF on our app or web platform
4. Choose how many shares you’d like to buy
5.  Place your deal and monitor your investment

Investors look to grow their capital through share price returns and dividends - if paid.

But the value of investments can fall as well as rise, past performance is no indicator of future returns, and you could get back less than your original investment.

Best Index Funds and ETFs to watch

The following Index Funds and ETFs are some of the largest and most popular in the UK.

Three Index Funds to consider include:

UBS S&P 500 Index Fund

The UBS S&P 500 Index Fund is a low-cost index tracker that tracks the performance of the S&P 500, offering exposure to the 500 largest US-listed companies, by market capitalisation. With an ongoing charge of 0.09%, it’s a competitively priced option for investors seeking long-term growth. It covers Magnificent Seven companies like Apple, Microsoft and Amazon, while also providing diversification across multiple sectors. As a passive fund, it suits buy-and-hold investors aiming for steady, broad market exposure.

Legal & General US Index Trust

The Legal & General US Index Trust is a UK-domiciled index fund that tracks a similar basket of large-cap US-based stocks, typically based on the FTSE USA Index or a variant of the S&P 500. With an ultra-low ongoing charge of 0.05%, it is one of the most cost-effective ways for UK investors to access the US, making it especially well-suited for long-term investors looking for efficient global diversification with minimal fees. 

Vanguard FTSE 100 Index Unit Trust

The Vanguard FTSE 100 Index Unit Trust tracks the FTSE 100 Index, providing low-cost exposure to the 100 largest companies by market capitalisation listed on the London Stock Exchange. With an ongoing charge of 0.06%, it’s another popular index fund for UK those seeking cost-efficient access to the country’s largest and most established firms. It’s broadly diversified across sectors including energy, finance and consumer staples, and typically distributes dividends quarterly.

Three ETFs to consider include:

WisdomTree Physical Gold

WisdomTree Physical Gold is also known as an exchange-traded commodity (ETC) because it holds a physical commodity instead of stocks. It offers investors direct exposure to the spot price of gold by holding fully allocated physical gold bullion, providing a convenient, low-cost way to hedge against inflation, currency volatility and market instability without the expense of storing physical gold.

It's especially useful in these times of global economic uncertainty, as gold traditionally serves as a ‘safe haven’ asset, even more so during US Dollar weakness.

iShares Core FTSE 100 UCITS ETF DIST

The iShares Core FTSE 100 UCITS ETF (Dist) also tracks the performance of the FTSE 100 Index. The ‘Dist’ in the name refers to distributing income, meaning this ETF pays out dividends to shareholders rather than reinvesting them. Again, this one is designed for investors looking for a diversified, blue-chip equity portfolio with a steady income stream. 

iShares FTSE UK Dividend UCITS ETF

The iShares UK Dividend UCITS ETF focuses on the highest dividend-yielding UK companies, as defined by the FTSE UK Dividend+ Index. This ETF is tailored for income-focused investors seeking consistent dividend payments and is often used in retirement planning or income portfolios. It tends to have a value tilt, favouring sectors where dividend payouts are historically stronger — though this does introduce sector concentration risks.

Key differences Between Index Funds and ETFs

Index funds and exchange-traded funds (ETFs) are both popular investment vehicles, but they differ in several ways — including structure, trading mechanisms and cost implications.

One of the primary distinctions is how they are bought and sold. Index funds are mutual funds that trade only once per day after the market closes, at the fund's net asset value (NAV). ETFs, on the other hand, trade throughout the day on stock exchanges, like individual stocks, and their prices fluctuate with market supply and demand.

Another key difference lies in investment minimums and accessibility. Index funds often have minimum investment requirements, which can range from a few hundred to several thousand pounds, making them less accessible for some investors. ETFs typically do not have such minimums beyond the price of one share, and some brokers even offer fractional shares, allowing greater flexibility for retail investors.

When comparing costs, both index funds and ETFs are usually low-cost, especially when tracking the major indices. However, ETFs tend to have slightly lower expense ratios and may be more cost-effective over time, particularly for passive investors using commission-free platforms like us.

That said, ETFs can involve trading fees or bid-ask spreads, which might erode returns for frequent traders or investors with small trades. ETFs with low trading volumes can sport relatively wide bid-ask spreads, making them slightly more expensive to trade. This is especially true for thematic or niche ETFs with fewer buyers and sellers.

Index funds tend to be preferred by investors who prefer a ‘set-it-and-forget-it’ approach and plan to contribute regularly without any concern for intraday pricing. ETFs offer more flexibility and better intraday liquidity, making them suitable for more active. Ultimately, the choice between the two often depends on an investor’s trading style — though it’s worth noting that the increased market availability of ETFs can make it more tempting to try to time the market.

Finally, both ETFs and index funds aim to follow an index, but differences in fees, replication method (physical vs synthetic), or market inefficiencies can lead to small deviations in performance — known as tracking error.

You might consider Index Funds if you like set-and-forget investing, automatic monthly contributions, or investing without worrying about intraday volatility. ETFs may be preferable if want real-time pricing, thematic exposure to niche sectors, or the flexibility to trade during the day.

Index Funds vs ETFs summed up

• Index Funds are mutual funds that passively track a market index, priced once daily. They’re usually preferred by long-term, low-maintenance investors who prefer automatic contributions
• ETFs (Exchange-Traded Funds) also track indices but trade like stocks on exchanges throughout the day, offering flexibility, real-time pricing and thematic options
• The main differences include the trading method, accessibility and fees
• Choosing between them depends on your personal investing style