01 Feb

I believe the choice of which type of investment to pursue — if only one is to be chosen — is more a question of passive versus active management style, and it is not mutually exclusive. Certain investors might choose to own both ETFs and mutual funds to round out their portfolios. Simply put, an examination of the advantages and disadvantages of both ETFs and mutual funds alone will not help you decide whether a particular investment strategy is best for you.

To decide whether it is best for you to invest in ETFs or mutual funds, the first step you need to take requires you to understand active versus passive investing strategies. If you believe in active management over passive management (i.e., you think there is value to someone choosing particular stocks over a broad-based index), then you will prefer mutual funds (Yes, there are several actively-managed ETFs, but not enough to choose from at this point).

Exchange-traded funds charge lower fees than actively managed mutual funds and offer investors a wide range of sectors, geographies and strategies. Investors in ETFs pay average annual expenses of $25 for every $10,000 of assets, compared with $91 for actively managed U.S. stock funds, according to Morningstar Inc. in Chicago. Investors pay a brokerage fee when they buy or sell ETFs, a drawback for active traders. Commissions can range from as little as zero for certain customers to $25 a trade.