Ask TheStreet: ETFs vs. Index Mutual Funds

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Can you tell me some of the differences between ETFs and index-based mutual funds? Thanks, G.G.

ETFs resemble index-based mutual funds in that both represent baskets of securities that track the performance of an index. However, there are key differences between ETFs and index funds, including how they trade, what they cost and what they can do.

Trading: ETFs are bought and sold through brokers and trade throughout the day on an exchange, like stocks. Because the share price is published throughout the day, traders are able to buy or sell shares as they please.

Index fund shares, on the other hand, are purchased from the holding fund, and share purchases and sales are only priced once a day, at the close of trading.

Costs: ETF expense ratios are generally cheaper. For instance, the expense ratio for Vanguard's Total Stock Market ETF (VTI Quote) is .07%, compared with an expense ratio of 0.19% for the firm's (VTSMX Quote)Total Stock Market Index Fund.

But there are two things to consider when it comes to comparing costs. First, many of the newer ETFs coming out are more expensive than the original plain-vanilla products.

Second, because ETFs are bought and sold through brokers, investors have to pay a commission each time they trade. This isn't a big issue for investors who plan on dumping a lot of money into an ETF and letting it sit. But for those who prefer to invest in small, regular increments, the brokerage fees will outweigh the benefit of the lower expenses.