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While some mutual funds are also passively managed index funds, others are actively managed. ETF customers might have to pay trading commissions, making frequent buying and selling expensive. Investors can use a traditional mutual fund or an exchange-traded fund (ETF) to establish a low-cost, well-diversified portfolio of stocks, bonds and other assets.

Transparency: Holdings in an ETF are disclosed on a regular, frequent basis, so investors know what they are investing in and where their money is parked. If you've invested in an active mutual fund that sells its underlying assets for profit, you may have to pay capital gains taxes every year.

ETFs allow you to buy as little as a single share, which means that you don't need a fortune to get in the market. Similar to these are ETFS Physical Palladium ( NYSE Arca : PALL ) and ETFS Physical Platinum ( NYSE Arca : PPLT ). However, most ETCs implement a futures trading strategy, which may produce quite different results from owning the commodity.

Lack of big gains: If you invest in an index mutual fund, do not expect to outpace the market as they are not designed to do so. This makes big gains harder to come by. We'll get to those rules in a bit, but for now, just remember that index mutual funds are passively managed and therefore typically lower-fee than actively managed ones.

The additional supply of ETF shares reduces the market price per share, generally eliminating the premium over net asset value. Instead, they seek to achieve a stated investment objective by investing in a portfolio of stocks, bonds, and other assets. Both types of funds have tax ramifications; for example, you might have to pay annual taxes if a mutual fund distributes earnings or other payouts before the end of the year—even if you don't haven't sold any of your shares.

The financial advisors of Titus Wealth Management are registered representatives with and securities are offered through LPL Financial, Member FINRA & SIPC Advisory services offered through Titus Wealth Management, a registered investment advisor and separate entity exchange traded bonds from LPL Financial.

Unlike mutual funds, however, ETF shares are traded on a national stock exchange and at market prices that may or may not be the same as the net asset value (NAV”) of the shares, that is, the value of the ETF's assets minus its liabilities divided by the number of shares outstanding.

A fund's investment strategy, as stated in its prospectus, determines the mix of securities the fund manager chooses to purchase and hold. Emerging market stocks or high-yield bonds are less efficient markets where deep research and a proven strategy can likely pay off.

Exchange-traded funds have proliferated in the last five years, but have not yet received much attention in the academic literature. ETFs offer greater flexibility than mutual funds when it comes to trading. If appreciated stocks are sold to free up the cash for the investor, then the fund captures that capital gain, which is distributed to shareholders before year-end.

With a mutual fund, you buy and sell based on dollars, not market price or shares. So be sure to read a fund's prospectus carefully to determine whether its strategy and costs may be suitable to your investment goals. Unlike with an index-based ETF, an adviser of an actively managed ETF may actively buy or sell components in the portfolio on a daily basis without regard to conformity with an index.