Confusion apart, the fact remains, that most people do not like the management and the investment policies and the high operating expenses associated with the actively managed mutual funds. The performance of mutual funds also does not offer the level of transparency that the investors would expect.

Another problem with the mutual funds is that the funds of the investors just lie in the portfolio for years. Though this may be a good investment policy as it brings in the benefits of long term investment, yet the investors cannot get the advantages of short term movements in the market.

For example, when Hurricane Katrina occurred in 2005, there was an upturn in crude oil prices. If the investors wanted to take advantage of this upsurge in crude oil prices, they would have to wait until the end of the business day when the net asset value ?NAV- is calculated. The investor would again have to wait till the next day to buy the shares of the mutual fund with the oil company holdings and the value of the share would remain unchanged till it was again determined only at the end of the day. By this time the value could fall again before the investor was able to sell his shares.

It may be noted that the value of the oil stock might have risen during the trading period in course of the day, but the investor could not take the advantage of the price rise and sell his shares. Moreover the investor would also have to pay penalties and possibly the sales commissions if he sold his shares. Mutual funds do not provide any investment tools for those who wish to invest on short term price movements.

Exchange Traded Funds or ETFs were, therefore, devised to remedy the problems that are associated with the mutual funds. ETFs are index funds as they are designed to track the major indexes such as the S&P 500 or NASDAQ.

ETFs may not be actively managed, but their returns are in-line with the benchmarks that they are designed to mirror. ETFs also mirror other indexes and offer a number of significant benefits to the investors. So if some tech company promises a good earning, with an ETF that tracked the NASDAQ, an investor can buy shares early on and then sell them later for a profit, because ETFs trade like stocks.

ETFs trade like stocks. Investors have to pay commissions for their trades in the same way they have to do for stocks. But even these commissions can be reduced considerably by finding brokerages that charge very low or flat commissions.

ETFs give the investors a great amount of flexibility along with the added benefit of reduced risks due to diversification at minimal expense. Asset allocation forms an important part of sound investment strategy. It is against all cannons of sound investment to put all the eggs in one basket. This is the reason why investment experts advise the investors to split the portfolio among a variety of asset classes.

Another big reason for the popularity of the ETFs is that they are much cheaper than the actively managed mutual funds. Most investors love to invest in ETFs because they are not actively managed and their low expense ratios allow the investors to invest more money in them. An average expense ratio for an ETF is between 0.1-0.7 percent.

A great complaint about mutual funds is against their high management operating fees and commissions that are taken out even before any shares are purchased. These deductions may lower the turnover and also reduce the amount of capital actually used to invest.

ETFs cover all major indexes, asset classes that any niche investor can imagine and aspire to invest in. There are ETFs that are comprised exclusively of specialty industries in the tech and energy sectors besides the commodities such as gold and oil. Investors can add real estate investments to their portfolio and can thus create a portfolio consisting of diversified investments quickly and simply by using ETFs.