An index fund and an ETF can hold exactly the same thing: the same companies, in the same proportions, with similar fees. What changes is the wrapper. And depending on where you pay tax, that wrapper can be worth thousands of euros.
How they are alike
Both track an index, a list of companies drawn up with fixed rules, such as the S&P 500 or the MSCI World. Neither tries to guess which share will rise, and that is why both are cheap. If you are not sure what an ETF is, start with What is an ETF and how it works.
How they differ
| Index fund | ETF | |
|---|---|---|
| Where you buy it | From the fund manager or a fund platform | On the stock exchange, through a broker |
| Price | Once a day, at the close | Changes every moment while the exchange is open |
| Switching to another fund | Tax-free in some countries, such as Spain | You sell and pay tax on the gain |
| Range | Smaller | Much larger; physical gold ETCs also trade on exchanges |
That an ETF has a price every moment matters little to someone investing for ten or twenty years. What can matter is the third row.
The tax-free switch, with an example from Spain
In Spain, article 94 of the income tax law lets you move money from one investment fund to another without paying tax on the gain. The tax office collects nothing until you actually take the money out. The same law expressly excludes ETFs: to switch from one to another you have to sell, and when you sell, you pay.
Say you put in 10,000 euros and over the years it has become 20,000. You want to move to another product, because it is cheaper or because you prefer another index.
With an index fund you make a transfer: the full 20,000 euros move to the new fund and keep working.
With an ETF you have to sell. The 10,000 euro gain is taxed as savings income: 19% on the first 6,000 and 21% on the next 4,000, 1,980 euros in all. 18,020 reach the new ETF.
You do not escape the tax, you defer it. But the 1,980 euros you do not pay today stay invested, earning returns for years, and that is compound interest working for you. It is the difference between moving house with all your furniture or having to leave some of it at the door.
Not every country works like this. Before choosing, check whether yours lets you switch funds without paying tax.
So which one?
If your country allows tax-free fund switches and you think you may change product one day, the index fund gives you a freedom the ETF does not. If what you are after is only sold on the exchange, such as physical gold through an ETC, the ETF or the ETC is the only option, and buying it to hold for decades shrinks the disadvantage a lot.
The two are not mutually exclusive. A portfolio can hold the equity part in switchable index funds and the gold in a physically backed ETC.
And the same mistake applies to both: choosing the wrapper well and filling it with a single country. Spreading across countries, sectors and gold matters more than the format. We explain it with the example of the S&P 500 in How to invest in the S&P 500 from Europe.
Which specific products fit your case and where to buy them at the lowest cost is what we work on in the first session. If you are just starting, the earlier steps are in Start investing from scratch.
Educational content. Not personalised financial or tax advice. The tax rules described are those for a Spanish tax resident in 2026; everyone is responsible for declaring their gains under the law of their own country.