To answer this we’ll use the example of the specific index ETF used in the pension plans available from PensionsForNomads and Investors Trust – the iShares S&P500 Index ETF.
An ETF is an “Exchange Traded Fund”, which means it is an investment fund which can be bought and sold on a stock market similar to how company stocks and shares (equities) can be bought and sold on a stock market. Unlike actively managed investment funds (also called mutual funds) which have their Net Asset Value (NAV) calculated at the end of the working day and are therefore bought and sold at the end-of-day closing price after the fund manager has made their trades that day, an ETF is mathematically run based on what they are investing into – so an S&P500 Index ETF automatically tracks the S&P Index, without needing a fund manager to make decisions.
Buying shares in an ETF which owns equities (stocks and shares) in 500 companies is like buying equities in all 500 companies separately, except that instead of making 500 different purchases (and paying 500 different trade fees), you’re just making one trade (and only paying one trade fee). It works exactly the same in reverse, if you’re selling/withdrawing.
So the two reasons why it is lower cost to invest into an index ETF are firstly that there are significantly less fees to pay to do so, and secondly that it doesn’t require a fund manager to be paid to run the investment portfolio.