ETF vs index fund vs index CFD: costs, ownership and holding period

An ETF and an index fund both let you own units in a fund that tracks an index, without leverage; the difference is that ETF shares trade on an exchange throughout the day, while index fund units are bought from the fund manager once a day at the next calculated price. An index CFD is a leveraged contract with a provider that pays the difference in the index level between opening and closing, with no ownership of anything. Which costs less depends mostly on how long you hold: a CFD can be the cheapest route for a trade lasting hours, and is usually by far the most expensive for a position held for months or years.

This guide puts the three side by side and runs one example through five holding periods. For background on each product, see ETFs explained, trading index CFDs and what is a stock index.

Three products, one index

Imagine you want exposure to a broad equity index such as the S&P 500 or the MSCI World. There are three common retail routes.

• An index ETF. A fund, usually a UCITS fund for European investors, whose shares are listed on a stock exchange. You buy and sell them through a broker like shares, at the market price, any time the exchange is open.
• A traditional index fund. Also a fund tracking the index, but not listed. You buy units from the fund manager, usually through a fund platform or broker, and every order placed before the daily cut-off is filled at the price calculated at the next valuation point. Many index funds are open-ended investment companies or unit trusts in the UK, or SICAVs and common contractual funds in Europe.
• An index CFD. A contract for difference quoted by a broker on the index level. You choose the number of contracts, post margin, and receive or pay the change in the index times your position size. Nothing is owned on your behalf.

Many ETFs and index funds track the same index, sometimes from the same manager, and their long-run returns before costs are very similar. The CFD also tracks the index closely, because the provider prices it from the index futures market. What differs is ownership, how the price is set, leverage, and especially cost structure.

Ownership and what you actually hold

ETF and index fund: you own units

When you buy an ETF share or an index fund unit, you own part of a fund. The fund's assets are held by an independent depositary or trustee, separate from the manager's own balance sheet. If the manager failed, the fund's assets would not be available to its creditors. Your broker or platform holds your units in custody, separate from its own money, under client asset rules.

Owning units brings some practical rights: you receive distributions (or they are reinvested inside an accumulating share class), and you can hold for as long as you like with no expiry.

CFD: you have a contract with the provider

A CFD position is an agreement between you and the broker. There is no fund unit, share or other asset held for you. Your protection comes from the broker's regulation: client money segregation and, if the firm fails, an investor compensation scheme up to its limits. In the EU the minimum required coverage under the Investor Compensation Schemes Directive is 20,000 euros per client; in the UK the FSCS covers eligible investment claims up to 85,000 pounds. You can check a firm's authorisation using our regulator registers page.

You can also go short with a CFD, which neither an ordinary ETF nor an index fund allows.

How the price is set

ETF: market price during the day

ETF shares trade continuously while the exchange is open. Market makers keep the price close to the value of the underlying holdings through the creation and redemption process. You see a bid and an ask, pay the spread when you trade, and usually pay a broker commission. If you trade a European-listed ETF on a US index while the US market is closed, spreads tend to be wider because market makers have to price from futures.

Index fund: forward pricing once a day

An index fund is valued once a day at a set valuation point, often around the close of the main market it invests in. You place an order without knowing the exact price; it is filled at the next valuation. This forward pricing means you cannot trade during the day, set a limit price or react to intraday moves. For a long-term investor this rarely matters. For a trader it rules the product out. Some funds apply swing pricing or a dilution levy, which adjusts the price when large inflows or outflows would otherwise impose trading costs on existing holders.

CFD: the provider's quote

A cash index CFD is priced by the broker from the nearest index future, adjusted to approximate the underlying index level, and quoted almost around the clock on major indices. You trade at the broker's bid and ask. Hours and breaks are in the provider's contract specification.

Leverage and the most you can lose

ETFs and index funds are normally bought outright. You pay the full value and the most you can lose is what you invested. Some brokers allow margin lending against ETF holdings, but that is a separate arrangement.

An index CFD is leveraged by design. Under the ESMA rules for retail clients, major index CFDs can be traded with leverage of up to 20:1, meaning a 5% margin; minor indices are capped at 10:1. A 10,000-euro exposure therefore needs as little as 500 euros of margin. If the index falls 5%, that 500 euros is gone. EU retail clients have negative balance protection and a 50% margin close-out rule, but you can still lose your whole account balance quickly, and most retail CFD accounts lose money.

Leverage is optional in one sense: you can hold enough cash in the account that a CFD position is not effectively leveraged. But financing is still charged on the full exposure, as the example below shows.

The costs, line by line

Costs of an ETF

• Ongoing charge (TER or OCF): an annual percentage deducted inside the fund. Broad index ETFs are typically among the cheapest funds available.
• Broker commission: per trade, varies widely between brokers.
• Bid-ask spread: paid on each purchase and sale; small on large, liquid ETFs.
• Currency conversion: if the ETF trades in a currency different from your account, the broker may charge an FX fee on each trade. See currency conversion and account base currency.
• Platform or custody fee: some brokers charge an annual account fee.

Costs of an index fund

• Ongoing charge: similar logic to an ETF; many index funds are also very cheap.
• Platform fee: fund platforms often charge an annual percentage of the value held, sometimes with a cap, which can be larger than the fund's own charge.
• Dealing charges: sometimes zero for funds, sometimes a flat fee.
• Entry or exit charges: rare on index funds but possible; the KID lists them.

Costs of an index CFD

• Spread: usually tight on major indices during their main session.
• Commission: usually none on index CFDs, but check.
• Overnight financing: charged every night the position is held past the provider's cut-off, as a percentage of the full notional value, typically a benchmark interest rate plus the provider's markup. On cash index CFDs, weekend financing is often charged on one day of the week. See swap and overnight financing.
• Dividend adjustments: on price-return indices, long positions are credited and short positions debited when index constituents go ex-dividend. This roughly offsets the dividends a fund holder would receive, so we leave it out of the comparison below.

The structural difference is that fund costs are mostly a small annual percentage, while CFD financing is a much larger annual percentage applied to the whole exposure and charged daily. Over a few hours the CFD's tight spread can win. Over months, financing wins every time.

Worked example: five holding periods

Illustrative numbers only. Real charges vary by provider, fund and market conditions; use your own figures. You want 10,000 euros of exposure to the same broad equity index.

Assumptions:

• ETF: ongoing charge 0.20% a year; commission 5 euros per trade (10 euros round trip); spread cost negligible on a large ETF.
• Index fund: ongoing charge 0.10% a year plus a platform fee of 0.25% a year, so 0.35% a year in total; no dealing charge.
• Index CFD: round-trip spread cost of 2 euros; no commission; overnight financing at an assumed 5.5% a year (a benchmark rate plus markup) on the 10,000-euro notional, charged for every calendar night.

Annual charges are prorated by days held, ignoring compounding. The results:

• Intraday (opened and closed the same day): ETF about 10 euros, mostly commission. Index fund: not possible, because the fund deals once a day. CFD 2 euros, as no overnight financing applies.
• One week: ETF about 10.38 euros. Index fund about 0.67 euros. CFD about 12.55 euros (2 euros of spread plus about 10.55 euros of financing).
• Three months (91 days): ETF about 14.99 euros. Index fund about 8.73 euros. CFD about 139 euros.
• One year: ETF about 30 euros. Index fund about 35 euros. CFD about 552 euros.
• Five years: ETF about 110 euros. Index fund about 175 euros. CFD about 2,752 euros.

Some observations from the numbers:

• In this example, CFD financing costs about 1.51 euros a night. The CFD's cost advantage over the ETF, 8 euros of commission saved, is used up after about five nights.
• Between the two funds, the cheaper one depends on the split between fixed trading costs and annual percentage charges. Here the ETF's commission makes it dearer over short periods, but its lower total annual charge makes it cheaper after about eight months. Change the platform fee or the commission and the crossover moves.
• Over five years, the CFD costs about 27.5% of the original exposure in financing alone in this example. That is why CFDs are generally described as short-term trading products, and why the how to compare trading costs approach of building an all-in figure for your actual holding period matters.

What leverage does to the same example

Now suppose the investor only has 2,000 euros and uses the CFD to get 10,000 euros of exposure. The financing cost is the same, because it is charged on the notional value. But a 10% fall in the index costs 1,000 euros, half the account, plus financing. With the ETF or fund, 2,000 euros buys 2,000 euros of exposure, and the same 10% fall costs 200 euros.

The CFD did not make the market more volatile. It made the position five times larger relative to the money at risk. The margin calculator and profit and loss calculator let you run the numbers for your own position.

Access, availability and paperwork

• EU retail investors can buy UCITS ETFs and UCITS index funds that publish a PRIIPs key information document. US-listed ETFs are generally unavailable because they do not publish one; the ETF guide explains why.
• Index funds are often sold mainly through platforms in their home market, so availability varies more by country than for ETFs.
• CFDs require an appropriateness assessment and come with a standard risk warning showing the percentage of the provider's retail accounts that lose money. Retail leverage limits apply in the EU and UK. Our guide to reading a key information document explains what the CFD's KID shows.
• Tax treatment differs between the three products and between countries; in some places it is a deciding factor. This guide does not cover tax; check the rules where you live.

Which fits which purpose

There is no single best product; each is designed for a different job.

• Long-term, unleveraged exposure: an ETF or index fund, chosen on total cost (ongoing charge plus platform and trading costs), the index tracked and the share class you need. The difference between a good ETF and a good index fund is usually small compared with the difference between either and a CFD.
• Regular monthly investing: index funds often allow small regular contributions without dealing fees; some brokers offer ETF savings plans that do the same.
• Short-term trading, going short, or intraday exposure: an index CFD or futures, with the leverage and loss risk that comes with them. Brokers also offer futures-based index CFDs with no daily financing, which can be cheaper for holds of several weeks.
• Hedging an existing portfolio for a short period: traders often use short index CFDs or futures because selling and repurchasing fund holdings can be costly or have tax consequences.

Common mistakes

• Comparing ongoing charges only. A fund with a lower charge on a platform with a high percentage fee can cost more than a slightly pricier ETF at a low-fee broker.
• Using a CFD as a buy-and-hold investment. Overnight financing on the full notional compounds into a large cost over years, even if the position is fully funded with cash.
• Forgetting that CFD leverage is applied to your capital, not the market. A 5% index move is ordinary; at 20:1 it equals your whole margin.
• Assuming an index fund can be traded like an ETF. Forward pricing means you do not know your dealing price when you place the order.
• Ignoring FX fees. Buying a US-dollar-denominated ETF line from a euro account can add a conversion fee each way that outweighs the ongoing charge over short holds.
• Treating a CFD as ownership. You have no claim on any underlying asset, only a contract with the provider.

Frequently asked questions

Is an ETF an index fund?

Most ETFs are index funds in the broad sense: they track an index. In everyday usage, though, "index fund" usually means an unlisted fund you buy from the manager at a once-a-day price, while an ETF is listed on an exchange and trades all day. Their long-run performance before costs is usually very similar if they track the same index.

Why is a CFD so expensive to hold for a long time?

Because the provider charges overnight financing on the full value of the position every night, typically a benchmark interest rate plus a markup. Fund ongoing charges are much smaller annual percentages. Over a few days the difference is small; over a year it can be ten or twenty times the cost of owning a fund, depending on rates and charges.

Can I lose more than I invested?

With an ETF or index fund bought outright, no: the most you can lose is the amount you paid. With a CFD, losses are based on the full position size, not the margin, so they can exceed the margin you put up. EU retail clients are protected by negative balance protection, which stops the account going below zero, but the whole balance can be lost.

Do I get dividends with an index CFD?

Not as dividends. On a price-return index CFD, long positions receive a cash adjustment when constituents go ex-dividend and short positions are debited. On total-return indices such as the DAX, there is no separate adjustment because dividends are already in the index level. Fund holders receive distributions or have them reinvested in an accumulating share class.

Which is cheaper for a few weeks?

It depends on your numbers. Fixed trading costs make funds relatively more expensive over very short holds, while nightly financing makes CFDs relatively more expensive the longer you hold. In our illustrative example, the CFD lost its cost advantage over the ETF after about five nights. A futures-based CFD with no daily financing may also be worth comparing for holds of several weeks.

Is my money safer in an ETF than in a CFD?

They carry different risks. ETF and fund assets are held by a depositary separate from the manager, and your units are held in custody separate from the broker's money. A CFD is a contract with the broker, so you depend on the broker's segregation of client money and, if it fails, the compensation scheme up to its limit. Market risk is higher with the CFD whenever you use leverage.