Index funds vs ETFs vs managed funds: what's the difference?
You'll see these three terms everywhere, often as if they were rivals. They're not quite. Here's what each one means and how they fit together.
The short answer
They describe different things. Index fund describes a fund's strategy: it follows a list of investments, such as the S&P 500 or the NZX 50, instead of a manager picking them. ETF (exchange-traded fund) and managed fund describe how you buy it: an ETF trades on a stock exchange like a share, while a managed fund is bought from the fund manager at a price that's usually set once a day.
So an index fund can be an ETF or a managed fund. What matters most is what's inside, what it costs, and how it's taxed.
What is an index fund?
An index is a list of investments chosen by a set of rules, such as “the 50 largest companies on the NZX”. An index fund simply buys what's on the list, in roughly the same proportions. When the list changes, the fund changes with it.
That's often called passive investing. The alternative is an actively managed fund, where a manager decides what to buy and sell. Index funds often charge lower fees, because there's less work involved in following a list than in picking investments.
What is an ETF?
An exchange-traded fund is a fund whose units are listed on a stock exchange, so you buy and sell them like shares. Its price moves through the trading day. Most ETFs follow an index, but some are actively managed.
In New Zealand you'll mostly come across two kinds: ETFs listed on the NZX, priced in NZ dollars, and ETFs listed overseas, mostly in the US, priced in US dollars. The two are taxed differently (more on that below).
What is a managed fund?
A managed fund pools money from many investors and is run by a fund manager. You buy units from the manager, directly or through a platform, at a unit price that's usually worked out once a day. Managed funds can follow an index or be actively managed.
Your KiwiSaver fund is a type of managed fund. Many NZ-based managed funds are PIEs, which affects how they're taxed.
How do ETFs and managed funds compare?
| ETF | Managed fund | |
|---|---|---|
| How you buy | On a stock exchange, through a broker or investing platform | From the fund manager, directly or through a platform |
| Price | Changes through the trading day | Usually set once a day |
| Follows an index? | Most do; some are actively managed | Many do; many are actively managed |
| Costs to look for | Fund fee, transaction fee, the gap between buy and sell prices, currency fees for overseas ETFs | Fund fee, platform fees, and sometimes entry, exit or buy/sell spread fees |
| Tax in NZ | Depends where it's based: some NZX-listed ETFs are PIEs; US-listed ETFs fall under the FIF rules | NZ-based funds are often PIEs, taxed at your PIR |
General features. Individual funds vary, so check each fund's disclosure documents.
Three ways a New Zealander might hold the S&P 500
| Held as | Price set | Tax |
|---|---|---|
| A US-listed ETF in US dollars | US trading hours (NZ night) | FIF rules, over the threshold |
| An NZX-listed ETF in NZ dollars | NZX trading hours | Often a PIE |
| An NZ managed fund in NZ dollars | Usually once a day | Often a PIE, at your PIR |
Same 500 companies underneath, different wrappers. The wrapper changes the fees, the currency and the tax, but not what the fund owns.
Is one of them better?
Not in general. They're different wrappers, and which suits someone depends on their situation. The things worth comparing between any two funds are:
- What it holds. The index or strategy, and how much it overlaps with what you already own. See is my portfolio diversified?
- What it costs in total, including platform and currency fees, not just the fund fee. See what fees cost you.
- How it's taxed. PIE or FIF. See PIR, PIE and FIF.
- Currency. Whether it's hedged, meaning the fund tries to reduce the effect of exchange-rate moves on overseas investments, or unhedged, meaning exchange rates affect its value in NZ dollars.
Common questions
Is an ETF an index fund?
Usually, but not always. Most ETFs follow an index, but some are actively managed. “ETF” describes how the fund is bought and sold (on a stock exchange); “index fund” describes its strategy.
Is KiwiSaver a managed fund?
Yes. A KiwiSaver fund is a type of managed fund: your contributions buy units in a fund run by a manager. Some KiwiSaver funds follow indexes and others are actively managed.
What's the difference between an index fund and a managed fund in NZ?
They answer different questions. “Index fund” is about strategy: following a list rather than picking investments. “Managed fund” is about structure: you buy units from a fund manager at a daily price. Many NZ managed funds are index funds.
What does hedged vs unhedged mean?
A hedged fund uses financial contracts to reduce the effect of exchange-rate changes on its overseas investments, so its value in NZ dollars mostly reflects the investments themselves. An unhedged fund doesn't, so a rising or falling NZ dollar also moves its value.
Are ETFs taxed as PIEs in New Zealand?
Some are. Some ETFs listed on the NZX are PIEs. ETFs listed overseas, such as in the US, aren't PIEs; they're overseas investments that fall under the FIF rules once your total cost goes over the threshold.
General information, not financial advice. This page explains how investing works in general. It doesn't take your situation, goals or attitude to risk into account, and it isn't a recommendation to buy, sell or hold anything. Investing involves risk: the value of your investments can go down as well as up, and you could get back less than you put in. Figures are from the sources below on the dates shown, and may have changed since.
Sources
- Sorted, Smart Investor: look up NZ managed funds, KiwiSaver funds and their fund updates.
- Inland Revenue, Prescribed investor rates (PIE tax).
- Inland Revenue, IR461 Guide to foreign investment funds (April 2026).
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