Before choosing between mutual funds and ETFs, decide if you prefer an active or passive fund.

Since its introduction in Canada in 1989, the exchange-traded fund has steadily gained popularity among investors and traders who want access to a basket of securities. Many traders appreciate the ability to buy and sell ETFs at market price during the trading day, a feature unavailable with mutual funds, which price once a day after markets close.

Other investors and traders like knowing exactly what an ETF holds at all times, rather than waiting for a mutual fund’s quarterly or twice-yearly report on its holdings, which could have changed by the time the report is released.

Nonetheless, ETFs still lag mutual funds in net assets invested. According to the Investment Company Institute, a trade association representing mutual funds. ETFs and other investment companies, U.S. mutual fund net assets totaled more than $15.5 trillion as of September 2014. In contrast, ETF assets totaled $1.8 trillion. Since 2000, ETF assets have grown at a faster clip, but that doesn’t mean an ETF is the right investment in any given situation, financial advisors say.

Rick Ferri, founder of investment management firm Portfolio Solutions in Troy, Michigan, says it’s better to start by asking what kind of investment philosophy you are trying to implement, and then decide on the delivery vehicle.

“When you go to buy a pair of shoes, you don’t care about the color of the shoebox,” he says. “You first have to decide what is it you’re trying to find for your portfolio. How it’s delivered to you is secondary.”

Certainly, ETFs have a reputation for being less expensive than mutual funds. There are a few reasons that can be the case. Most ETFs are indexed, meaning they track capitalization-weighted market indexes. That passive management style differs from more active stock picking, which the majority of mutual funds use.

Because there are higher costs associated with actively buying and selling stocks for a fund, index investing tends to be cheaper than active management. In addition, mutual funds carry what’s called a 12b-1 fee, which is essentially a marketing and operational expense that’s passed along to investors.

Jim Rowley, senior investment analyst at Vanguard Investment Strategy Group, says investors should not automatically assume an ETF will always be less expensive than a mutual fund. Unlike many fund providers, Vanguard often makes the same investment available in different share classes. That means the mutual fund and the ETF version of a total stock market fund, for example, are identical.

“Probably the No. 1 misconception is that it’s about ETFs versus mutual funds. At Vanguard, we offer both, and we like to say it’s ETFs and mutual funds. We don’t like to make it a ‘versus’ discussion,” he says.

Before choosing between an ETF and a mutual fund, investors should understand whether they want an actively managed fund or an index fund. Rowley says. He notes that both mutual funds and ETFs are organized and regulated under the Investment Advisers Act of 1940.

“The regulatory environment in which they exist is overwhelmingly similar, and that gets lost sometimes,” he says. “Once you get past the idea of the exchange-traded features and doing your transacting at a market price rather than net asset value, you have to come back to your investment strategy. Do you want an indexing or an active strategy?”

Michael Iachini, managing director of mutual fund and ETF research for Charles Schwab Investment Advisory, says an investor’s unique financial goals should dictate the choice between the two types of funds.

“The case for ETFs is pretty well known. It’s largely about costs, tradability, diversification and transparency,” he says. “That said, there are definitely cases where an investor might prefer mutual funds. For example, when an investor wants active management, a mutual fund may make the most sense.

“If that’s what you want, you don’t have that many choices in ETFs, and you have thousands of choices in the mutual fund world. The odds are good, if it’s an active strategy you are looking for, you can find it in a mutual fund. It might not even exist in an ETF framework, and certainly if there’s a specific manager you want, they’re probably not managing ETFs now,” Iachini says.

Investors sometimes assume mutual funds come with a front-end load, or a fee charged at the time of purchase. Although that’s not always the case, investors should be cognizant of potential fees when they trade an ETF, Rowley says.

He cautions that mutual fund loads are not the only areas where investors need to be vigilant about fees. “You can also buy and sell an ETF, and you might be subject to a brokerage commission. No matter what you call that cost, it’s still a cost, and it has a grave impact on your investment performance,” he says. “Either way, investors need to be paying attention to that.”

Barry Randall, technology portfolio manager at Covestor, a platform that provides strategies to self-directed investors, says a mutual fund may be the right choice for investors with a longer time horizon and little interest in trading. “If you plan to hold your investments for a long time and have broad-based exposure, I would recommend that you stick to a particular mutual fund that’s highly rated – four or five stars from Morningstar or a good rating from Lipper,” says Randall, who earlier in his career was a technology and small-cap mutual fund portfolio manager.

“Conversely, the shorter your time frame and the narrower your focus, the better off you are likely to be with an ETF product. In that case, you are likely to be making more trades, and therefore, you are going to want to have lower fees to get in and out of a particular product,” he says.

Randall cautions that ETFs’ tradability is not terribly important for long-term investors with more of a buy-and-hold philosophy.

“Tradability is a canard. You’re really talking about the ability to buy at 10:30 in the morning and sell at 2:45 in the afternoon. Otherwise, there’s functionally no difference, because you’re going to get a mark-to-market price if you are buying at the beginning or end of the day. So I think that’s an overestimated virtue of ETFs,” he says.