ETFs are mini-mutual funds with much smaller expense costs and can be bought and sold during the day just like stocks. You don’t have to wait for the end of the day and wonder what price was received. The investor needs a brokerage account.

They chart like stocks with a high, low and close. Regular mutual funds give only the settlement price at the end of the day.

Standard mutual funds have managers who will make changes in the fund portfolio that won’t show until the next reporting period. Fund managers want you to buy and hold for one basic reason. They are paid by the amount of money in the fund and not on its performance. Some, in fact most standard funds, will have penalties as high as 2% if the investor sells within a short period of time.

ETFs stay with the same portfolio of stocks with almost no changes during the year. Price quotes change as the stocks within their group change. An ETF portfolio may be as large as the S&P500 or have as few as 10 stocks in a sector fund. There are leveraged funds that will move at 200% and 300%. SPY moves 1 to 1 with the S&P while SSO trades at 2 for 1.

ETFs may be day traded for the commission cost of regular stock transactions. Mutual funds have an average expense of 1.5% every year plus commission, if any. ETFs have an average of .2 to .5%. As you know I am NOT an advocate of day trading even though I was a floor trader and exchange member for 17 years.

Like most mutual funds the ETFs do not have the volatility of individual shares. Many mutual funds do buy and sell ETFs for their own portfolios, but they don’t want you to buy them for yours. Fund managers prefer to buy individual stocks.

Stop loss and buy stop orders may be placed as with regular stocks. Standard mutual funds will not allow stops of any kind. There will be periods of time when the prudent investor is out of the market watching and guarding his capital until the right time to enter again. Being out for almost any investor is one of the most difficult emotional times.

Being in cash while the market is sinking does make you feel good. This is called a reverse profit. Look back at the 2008. Think how you would have felt if you had been in cash for much of that decline. More than 90% of managed accounts including mutual funds lost 40% of their capital. It is plain stupid not to have an exit strategy.

In 2008 the S&P500 was back down to the same price as it was 10 years before.. Buy and Hold was a killer strategy.

The big advantage to ETFs is versatility and lower expense maintenance.

Copyright 2009 Albert W. Thomas All rights reserved. Author of "IF IT DOESN'T GO UP, DON'T BUY IT!"