On the investment stage, mutual funds need no introduction. But mutual funds do have their limitations. For starters, the actively managed variety passes overhead costs research and management expenses on to investors, which eat away at returns. Funds also distribute capital gains at the end of each year, a taxable event for shareholders — even in years with negative returns.

This is true of both actively managed and index funds, though the latter are more tax-efficient. Enter the more sophisticated exchange-traded fund, or ETF, which arrived on the scene in and has fast become the investment tool of choice for Wall Street and Main Street investors alike. ETFs, most of which track the performance of a stock or bond index, are much like index funds, with a bit more bling.

Offering broad market exposure, tax efficiency and lower operating costs, they are designed to pick up where mutual funds leave off.

ETF prices fluctuate in real time throughout the day, making them well-suited for individual investors engaged in intraday trading. They can also be bought on margin — using borrowed money — and sold short for those betting on a market slide.

ETF investors sell shares to other investors. With a few exceptions, any time you trade an ETF, notes Morris, you pay a brokerage commission, making them less attractive for active traders and anyone using a dollar-cost average investment strategy — those who buy into a position with small, periodic investments over time. Some online brokers do offer commission-free ETFshowever.

At the same time, the flexibility to trade ETFs like stocks can also become a pitfall for some investors.

Despite their growing popularity, ETFs remain largely unavailable to investors through k s and other employee-sponsored retirement planswhich often restrict their offerings to mutual funds. Those considering new investments for their personal portfolio, however, should weigh the pros and cons of ETFs and mutual funds vs stocks pros and cons funds against their need for tax efficiency and flexibility.

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What Is a Mutual Fund - Definition, Types, Pros & Cons

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What are the advantages and disadvantages of mutual funds? | Investopedia

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Pros and Cons of Investing in Mutual Funds - Cash Money Life

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