This is one of the 20 tough financial questions posed in the “Do This or That?” cover story in the September 2011 issue of Kiplinger’s Personal Finance. Use the drop-down menu above to consider other financial conundrums and the right answers for you; share your own experiences and insights in the Discuss field at the bottom of this page.
Invest in exchange-traded funds if you want to be able to buy and sell funds when the markets are open, and you feel comfortable placing orders—for example, you know the difference between a stop-loss order and a stop-limit order. You may also be partial to ETFs if you want to lower your costs; fees for many ETFs, most of which simply track an index, are rock-bottom. And ETFs are a smart bet if you expect to trade rarely or to work with a discount broker that waives trading commissions for certain ETFs (as Fidelity, Schwab, Scottrade, TD Ameritrade and Vanguard do). In addition, consider ETFs and similar exchange-traded products if you want to invest in asset classes or employ strategies that may not be available with regular funds (see When Exchange-Traded Notes Trump ETFs). For example, a good way to invest in gold bullion is through iShares Gold Trust (IAU).
Invest in regular mutual funds if you think you can pick managers who can beat their benchmarks and you’re willing to do the research necessary to find them. (You can also buy index funds in mutual fund format.) Use regular funds if you’d rather not have to worry about placing stock-market-like trades, or if you worry that some crazy market event, such as the May 2010 flash crash, could wreak havoc with prices of ETFs. Finally, use mutual funds if you want to practice dollar-cost averaging—investing a fixed amount at fixed intervals.