One: Expense ratios

This is an easy one or so it might seem. Expressed as a percentage, a side-by-side comparison of two similar funds, one an ETF, the other a mutual fund, the expense ratio will appear to many investors as less expensive. It might be only by a tenth or even a hundredth of a percentage point. Yet over the long-term, this is argued as a worthwhile consideration.

ETFs do have lower expenses than mutual funds for one structural reasons. Once the ETF is created, the annual cost of running the fund remains low to non-existent. ETFs make no changes to the underlying portfolio of securities once it is created, with the exception of index tracking changes or if the ETF is actively managed.

Mutual funds on the other hand pay for management, auditing, legal, custodial services, advisors and taxes. In some cases the cost of marketing is also added in to the mix, referred to as a 12b-1 fee.

Two: Purchasing

Brokerage fees or commissions should play a role in the consideration of ETFs.

Companies like Fidelity offer commission-free trades for example but with certain restrictions. Sixty-five iShare ETFs can be purchased through this company without cost. Beyond those offerings, the remaining ETFs Fidelity offers come with a $7.95 fee. There is also minimum 30-day holding period with a penalty of $7.95 if the fund is sold before that time.

Ameritrade offers 100 commission free trades but only for a select group of investors. Many companies advertise this sort of discount, some with high initial brokerage account balances, to lure investors into this market.

Once those ‘free trade’ offers expire, commissions will begin to eat away at the purchase, which, the investor should note is paid on both ends of the trade.

Three: Dollar Cost Averaging

With mutual funds, dollar cost averaging is the preferred method of investing. It is a disciplined way to avoid purchasing too much of the fund when shares are high and allows you to buy more when shares are lower. This practice lends itself to a long-term strategy.

Adding cash to the ETF on a regular basis, as is done with dollar cost average purchasing of mutual funds should be carefully considered.

Perhaps this cost-of-trading for each purchase could be considered as a sort of load fee. If for example the cost of buying an ETF share were $7.95 (as in the Fidelity example above) your ETF would need to grow 7.95% in order to recoup the cost of the trade. This would also need to be calculated on the selling end as well.