Exchange traded funds (ETFs) are popular investment tools, no doubt, and now some of their newest fans seem to be one of their biggest rivals - mutual funds.

More and more mutual funds are beginning to invest in ETFs, which track market benchmarks and trade through out the day on exchanges like a single stock, says Allison Bisbey Colter for The Wall Street Journal.

Since ETFs are more tax-efficient than mutual funds and are less expensive with lower expense ratios, financial managers are enjoying this type of one-stop shopping for their portfolios. So far, mostly target-date retirement funds are investing in ETFs, according to Morningstar, which says that of the 49 mutual funds they track, 70% of their assets are invested in ETFs.

Many financial advisors also warn of the dangers involved with jumping in before you are educated. A drawback of a mutual fund that invests in an ETF is that you lose the flexibility and tax efficiency of an ETF once it is invested into by a mutual fund. A fund-of-a-funds’ price can also go upwards, and tax efficiency can also dissolve as capital gains are shared with mutual fund holders.

It is important to research any investment tool completely, and do not be swayed until you are aware of the advantages and drawbacks because there can be many hiding in the inner workings.

Tags: Mutual Funds, Retirement

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