What is the difference between ETFs and index funds?

Costs

ETFs trade on an exchange and each transaction is subject to a brokerage commission. In general, mutual funds obtained directly from the fund company itself do not charge a brokerage fee. However, selling mutual funds can be subject to some fees.

Most ETFs have a lower expense ratio than appropriate mutual funds.

Taxation

In most cases, ETFs are more tax-efficient than conventional mutual funds in the same asset classes or categories.

Trading

Index funds are traded at the end of a trade day, and the price reflects its Net Assets Value. On the other hand, ETFs are traded throughout the day.

ETFs behaves like any other stock. You can use short selling, buying on margin, stop loss order, limit order and even options. Another important fact is that there is no minimum investment requirement. Mutual funds do not have those features.

ETFs or Index funds?

If you are a passive long term investor (buy and hold) , then index fund is probably the best options. On the other hand, ETFs are the best options for institutional investors and active investors.

Further reading

ETFs Vs Index Funds: Quantifying The Differences

Mutual Funds v ETFs