I’ve heard that an Exchange-Traded Fund is basically just an open-end mutual fund, so is there a difference? What should I know about Exchange-Traded funds?

Over the past several years, Exchange-traded funds have become quite popular. There are now more than 1,200 ETFs available, adding up to more than $1 trillion in assets, according to National Stock Exchange.

Investors have flocked to ETFs because of their low costs, tax efficiency and stock-like features. But before you decide to invest, be sure that you understand exactly what you are buying.

An ETF is similar to an open-end mutual fund in that they both offer investors a pool of securities. But that is largely where the similarities end.

Perhaps the biggest difference between mutual funds and ETFs is in how they trade. ETFs trade like individual stocks. Their prices fluctuate throughout the day, allowing investors to buy and sell anytime the markets are open.

Mutual funds, on the other hand, settle at the end of the day, meaning that investors must wait to redeem or buy based on a mutual fund’s net asset value after the markets close.

ETFs also tend to be more tax-efficient because they typically generate relatively low capital gains from fund distributions. ETFs usually have lower turnover of securities because they are not required to sell securities to meet investor redemptions, like mutual funds. When a mutual fund sells securities, it must pass along the capital gains to shareholders, even though the shareholders have not redeemed their shares.

This can create an unwanted surprise at tax time.

The lower fees on ETFs can be a benefit, but they can also be a trap. ETFs do not charge redemption fees, and typically have lower expense ratios than mutual funds. However, every time an investor buys or sells an ETF, he or she pays a brokerage commission. For frequent traders, these fees can quickly surpass the lower annual costs that ETFs usually charge.

There are many types of ETFs based on their underlying pools of securities. Index ETFs provide diversification across an entire index such as the S&P 500. You’ll also find more specialized ETFs offering exposure to a diverse variety of markets, including country-specific indexes, sector-specific indexes, bond indexes, and commodities indexes.

If you are not confident in your ability to choose the best ETFs for your portfolio, consider speaking to a financial adviser about which investments might be appropriate for you.

John Gin is a certified financial planner in the local office of a national financial services firm. Send questions to Money Watch, The Times-Picayune, 3800 Howard Ave. New Orleans, LA 70125.