You had to go and ask – why should you invest in exchange traded funds (ETFs)?

We talked to Katy Marquardt for U.S. News & World Report earlier this week about that very question. While ETFs are still a small industry compared to that of mutual funds, $600 billion-plus in assets compared to $12 trillion in mutual funds, they’re quickly gaining traction among investors.

The mutual fund industry has contributed in part to some of its own problems because of some bad behavior that led investors to lose trust.

If you’re among those fed-up investors considering ETFS, among the things to keep in mind include:

  • How well has your mutual fund performed against its benchmark? Most do underperform, studies have shown, and if yours is one of them, it might be worth considering making the switch to an equivalent ETF.
  • The majority of mutual fund investors have high allocations among large-cap stocks. If this is your situation, ETFs will allow you to diversify a little better into other areas, including small- and mid-cap stocks, which have been outperforming the large caps lately. Today, there is more variety than ever to do that.
  • The fees. The average actively managed mutual fund charges 1.57%. It might sound like small potatoes, but over time, that really eats into your returns. The average domestic asset class-based ETF charges between 0.15% and 0.20%. Not all ETFs are cheaper than all mutual funds, and consider the performance, too. Some funds do outperform their benchmarks well enough that the extra cost may be worth it.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.