Problem: For what type of investors are index funds versus exchange-traded index funds best suited?

Objective: The purpose of the paper is to determine how an index fund or an exchange-traded index fund (ETF) suits different types of investors with different requirements in terms of time frame, investment size and purpose of investment. The comparison is based on fees and trade practicality. This is going to describe the advantages and disadvantages with the two different financial instruments.

Method: The study is a comparative study using two methods; one of which is a case study, the other is a qualitative interview. The case study focuses on fees and is made on an exchange traded fund (XACT OMXS30) and a simple equity index fund (Erik Pensér equity enhanced index). The interview is a more general comparison of the differences between ETFs and stock index funds. Focus here is on trade practicality.

Results: The study concludes that XACT OMXS30 is more suitable for a large investor, that makes fewer transactions and that saves on long term. Erik Pensér equity enhanced index fund is suitable for both short and longer term investors. However, taken to extremes XACT OMXS30 is always cheaper than Erik Pensér in the long term. Regarding purpose of investment, when doing monthly saving Erik Pensér is more beneficiary whilst the differences are less evident when saving on yearly basis. The study also shows is that the commission is most critical for which of the two investigated funds the investor should choose. Generally, ETFs is better suited for active traders as transaction are more flexible. Also, a benefit of ETFs for active traders is that they have made it easier to speculate on short term volatility on the stock exchange (e.g. using Bull & Bear with leverage).