ETF stands for exchange-traded fund, much like stocks. Most ETFs track an index, for example, Standard & Poor’s 500. Technically, one can’t invest directly in an index, but index mutual funds and ETFs based on indexes allow investors to invest in securities representing market segments or the total market.

Advantages:

An important benefit of an ETF is the stock-like features offered. A mutual fund is bought or sold at the end of a day’s trading, but ETFs can be traded whenever the market is open. Also ETFs have lower expense ratios in comparison to traditional mutual funds. So ETFs offer much flexibility and become competitive in the market. A broadly diversified ETF that is held over time can be a good investment.

Disadvantages:

The Vanguard Group, a leading issuer of index mutual fund, argued that ETFs represent short-term speculation, that their trading expenses decrease returns to investors, and that most ETFs provide insufficient diversification. In a survey of investment professionals, the most frequently cited disadvantage of ETFs was the unknown, untested indices used by many ETFs, followed by the overwhelming number of choices.