For millions of mutual fund investors who are concerned with the scandals in the industry, there is another alternative: exchange-traded-funds, or ETFs. These are investment companies that own baskets of stocks bundled as one portfolio and then priced and traded like a single stock. ETFs offer several advantages over mutual funds for individual investors:
Low expenses. Often, ETFs have lower costs than mutual funds because they don’t have the expense of shareholder accounting.
Flexibility. Because ETFs are stocks, not mutual funds, you can buy them on margin, sell them short, and place limit orders, techniques you can’t use (or can’t use easily) with mutual funds.
Tax benefits. You can sell a mutual fund at a loss and then buy a similar ETF without blowing your tax loss. Such a transaction will not violate the “wash sale” rules.
Moreover, some ETFs are intentionally structured so they seldom have to make capital gains distributions