In this bear market, are you contemplating the idea that your mutual fund is becoming more of a burden than an asset? Well, exchange traded funds (ETFs) may be an alternative solution to unnecessary headaches, since they provide nifty perks that mutual funds lack.

It has been calculated that more than three dozen funds paid more than 30% of their net asset value as capital gains, on top of diminishing 21% in returns, reports David Bogoslaw for BusinessWeek. Capital gains also increased because of funds being forced to sell legacy holdings in order to fund redemptions for investors who fled the market.

ETFs, on the other hand, only incur capital gains when the investor sells his or her shares. This tax advantage is only one of many other enticing qualities such as:

  1. Innate qualities. Transparency in ETFs allows advisers to better control a client’s investment portfolio. ETF sponsors also usually charge lower fees. Also, high volatility in stocks and bond markets have investors enjoying the liquidity of ETFs.
  2. Outperforming the S&P 500. Total assets under management in U.S.-listed ETFs dropped 12% while the S&P 500 fell 37% in 2008, according to State Street. Investors also took out more than $170 billion from U.S. mutual funds and put in $176 billion into ETFs.
  3. Targeted Asset Allocation. Many investors are readily using ETFs as the core in their allocation strategies. By seizing the benchmark return in cost-effective tools, investors would more likely reach their financial goals. Some advisors are switching to all-ETF strategies to more precisely target asset allocations and to avoid the distortions within mutual funds.
  4. Portability. ETFs are portable and investors are able to move their portfolios to different firms if one advisor’s performance is not up to par. Mutual fund complexes may not offer the same shares at a new firm, which means you would liquidate holdings and pay the tax penalties

But nothing is free, ETF investors may see a small rise in fees this year. Some ETFs might be closing up shop this year as a result of challenged markets, which means less competition. However, that doesn’t mean that ETFs won’t still be competitive with mutual funds by a long shot.

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.