Should I invest in ETFs?

It used to be that most investors would focus on a mutual fund for long-term investments. But a popular surrogate appeared and became very popular: Exchange-Traded Funds or ETFs. Think of ETFs as a mutual fund that changes in value all throughout the day rather than the traditional mutual fund that prices at the end of the trading day.

ETFs come in every flavor: small cap stocks, large cap stocks, emerging markets, sectors, bonds, REITs and new ones pop up every day. But the fact that you can trade these funds the way you trade stocks may not make you an investor. The very immediate liquidity that makes these securities attractive could also lure you to make short-term decisions with your long-term assets.

Some ETFs are clones of their mutual fund counterparts. Take as an example the $101 billion Vanguard Total Stock Market Index Fund (VTSMX) which provides the investor with an exposure to the broad U.S. market for stocks. The ETF version of this fund is VTI. What's the difference? Not much except that VTI can be bought and sold throughout the day. Is this a bad thing?

It really depends on your intent. The good thing about ETFs is that there isn't any restriction on trading in and out of them. Many mutual funds require that if you exit from a fund you may be restricted for 30 or 60 days before being able to buy back in. So it's a double-edged sword in that having the instant liquidity of an ETF may make you a more savvy trader but investors tend to do far better than traders in the long run. Remember, too, that each exit from almost all securities is a taxable event if held in an account that doesn't benefit from tax-deferral, such as an IRA or 401(k).

But if you must trade, at least start with good ETFs. Here's where to look: Vanguard ETFs