All replies are not really that clear. No mention of the internal operations of 'index funds'.

An ETF is just a term that the 'fund's shares are bought and sold on the exchange so retail investors can buy & sell the holding/fund in the same manner as buying & selling shares of a individual companies. There are 'mutual/managed funds' and there are 'index funds' for which ALL can be classed as ETFs because their shares are bought and sold in the same manner as buying shares on the stock exchange.

Now, "Index Funds" are more specific in the area of 'managed funds'. While they may be touted as being 'unmanaged' or having a passive investment approach, the clear difference is in their operation and differ to advertised "Actively Managed" funds where investors give their $ to the fund managers; then they take it to invest in 'what they hope' will provide the best return for their clients. Such actively managed funds claim to spend vast amounts of time and research to hunt down the right stocks to buy so they can 'SELECTIVELY' pick stocks to buy or sell on certain news or insider info, etc.. or what spin they tell their clients blah blah. Index Funds are done entirely different without this emphasis and coins the term 'passive' investment because they do nothing but proxy the return of a certain sector / industry / commodities or major market benchmarks such as your S&P500. There is no hand picking of when to buy or sell companies that we see with actively managed funds. In the case for the S&P500 index, an ETF that mimics this index will have low management fees because they only do what for eg what changes goes on in the S&P500 index and has no incentive to waste time on flight travels, visiting corporates, finding inside information, etc. that we see with most actively managed funds researching their stock picks.

Prior to 1960 (if I recall correctly), the only way a person could get the performance of the S&P500 was to purchase all 500 listed companies. A problematic task for the individual investor as share prices vary between all 500 companies so the investor would need to track the value of all 500 companies in order to maintain a proper, evenly weight distribution ownership. Then there's the divisiabilty problem where small amounts could not purchase all 500 companies evenly (ie if 1 stock was over $500/share, there would be no way a person with $100 could buy it because there's no such thing as buying a 1/4 of a share). Nowadays, with an Index Fund ETF (note how I add ETF), these problems are no more so, no matter if a person contributed $50/month or $5000/month, the index ETF would handle the management of the sums (as the fund pools the cash funds to get around the small divisability problem). Furthermore the index ETF would do proper rebalancing of the shares and keep track when the S&P500 adds a new company on the list and kicks off the other. Generally during this process the company being added to the list gets a temporary boost in share price while the company that gets off the S&P500 suffers more on it's share price.

So to clarify, an ETF is nothing more than a bunch of managed funds (you can say companies) where it's shares are open to the retail public to buy and sell. An Index Fund is nothing more than an ETF (or you can say a TYPE of company) where it's shares are open to the retail public to buy and sell directly.

I have a problem with companies like Sharesies because what they're doing is basically skimming NZ investors that want to buy their S&P500 fund since all they are doing is buying the Vanguard S&P500 Index ETF. Sharesies will get charged a managed fee by Vanguard and Sharesies will add their cut on top of that to the NZ investor. So why doesn't the NZ investor buy the Vanguard index fund directly? Because in NZ we have this stupid regulation called the FMA and also, issues around the FIF taxing of foreign investments (on account balances over $50K value). Yes it could be argued that Sharesies may handle the FDR 5% rate for clients buying their USF500 fund but I haven't seen the details on how they're addressing FIF for each client and how they assess resident witholding taxes.