Mutual funds are a managed portfolio of stocks, bonds or other financial assets. The institution which issues these mutual funds charges a 'management expense ratio' or MER to manage this portfolio. The MER is expressed as a percentage of the net asset value ( NAV ). The MER of mutual funds typically ranges from 2 to 5 percent. Traditionally mutual funds have provided an excellent medium by which an investor can diversify risk by investing in a basket of stocks.

Like mutual funds, ETFs can hold a portfolio of stocks, bonds or other financial assets. However, ETFs aren't managed by an institution. ETFs can simply mirror an entire stock index such as the NASDAQ or they can mirror ther performance of a basket of stocks. The advantages of ETFs are (1) lower management fees as they are not actively managed, (2) can trade intraday just as stocks and (3) are more tax efficient. Mutual funds cannot be traded intraday as stocks. Mutual funds are priced at the end of each day and reflect their net asset value. For these reasons ETFs are growing in popularity.

There are many different companies offering exchange traded funds. Some of the more popular etfs include Proshares, Ishares and Claymore Investments. ETFs are versatile in their ability to allow investors to target the broad market of selectively choose particular industries. ETFs can even allow investors to invest in precious metals such as gold and silver without actually having to take possession of these metals. Many companies offer both bull and bear ETFs allowing investors to choose whether they believe a certain sector will go up or down. If you believe that a particular fund will increase in value then purchase the Bull version, otherwise buy the Bear version.

Critics of ETFs would argue that mutual funds are better as they are actively managed by a team of professionals. This argument assumes that a team of professionals can consistently outperform the broader market. If you believe that mutual fund managers can deliver consistent returns higher than the broad market then you may wish to invest in mutual funds. If you believe that on average mutual funds cannot outperform the market then you may wish to buy etfs for their obvious advantages.