Exchange-traded funds have been in the news recently. A new survey says financial advisors are shifting client money to ETFs from mutual funds. An ETF provider announced it is dropping its more exotic ETFs. Another has launched an ETF for betting on silver prices. And on and on it goes.... So, should you be looking into ETFs?

Many ordinary investors are. The Investment Company Institute, the trade group for the mutual fund and ETF industry, says ETF assets now approach $600 billion, up from a mere $30 billion a decade ago. Mutual fund assets are still much larger, at about $10 trillion, but ETFs have steadily taken a bigger and bigger slice of the investment pie. Today there are more than 700 of them.

The lion’s share of ETFs are index-style investments that buy and hold stocks in a market barometer like the Standard & Poor’s 500 or Dow Jones Industrial Average.

As it does with mutual funds, indexing allows ETFs to charge fees, or expense ratios, much lower than those of actively managed funds that must pay teams of analysts and stock pickers.

In fact, ETFs charge even less than many comparable mutual funds. The SPDR ETF (Stock Quote: SPY) charges just 0.09%, or 90 cents a year for every $1,000 invested. The Vanguard 500 Index fund (Stock Quote: VFINX), which holds exactly the same stocks, charges 0.16%, or $1.60 per $1,000 invested. Many actively managed stock funds charge around 1.3%, or $13 per $1,000.

But if you’ve settled on indexing, fees are not the only consideration in choosing between an ETF and a comparable mutual fund. One reason ETFs are so cheap is that they are bought and sold like stocks, through a brokerage, so the ETF issuer does not have the expense of dealing with customers. To invest in a mutual fund, you or your broker must deal directly with the fund company, which must maintain a staff for the purpose.

But fund companies do not charge commissions when you buy or redeem mutual fund shares, while trading an ETF involves the same commission you’d pay trading a stock.

Commissions can add up even if you use a discount broker. So, as a rule of thumb, ETFs make sense for investors who do relatively few trades involving fairly large sums. But if you’re going to invest $100 every month, it will probably be cheaper to use a mutual fund, since the savings on commissions could easily offset the slightly higher expense ratio.

The same logic goes for withdrawals. If you’re going to take some money out every month in retirement, a fund many work better.
Another factor to consider: ETFs can be less expensive at tax time.

Most indexed investments are “tax efficient,” because managers make very few changes that involve sales of fund assets, which can trigger tax bills for investors using taxable accounts.

But index mutual funds can generate tax bills when they are forced to sell assets to raise money for investors who redeem shares. ETFs don’t have to sell assets for redemptions because the investor who decides to get rid of ETF shares simply sells them to someone else.
Active traders prefer ETFs because, like stocks, they can be bought and sold anytime during the trading day, allowing one to act on slight price changes. Mutual funds are priced just once a day, based on the closing prices of stocks they are holding when the markets close at 4 p.m. If you put in an order at 10 a.m. you get the 4 p.m. price.

There is a vast array of ETFs, from those that invest in the broad market to ones that track specific industries or stocks of certain countries or regions Some ETFs even track prices of commodities like gold.

For a list of ETFs, go to Morningstar Inc. (Stock Quote: MORN), the market data firm.

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