ETFs and mutual funds are both products commonly used to get equity exposure. Theyre often confused, but have important differences. Learning more about the advantages and disadvantages of ETFs and mutual funds can help distinguish your retirement strategy from being a huge success or a major flop.

An Exchange Traded Fund (ETF) generally seeks to mimic an index. It can be based on anything from the S&P 500 to gold futures to small-cap Emerging Markets. ETFs rely on a passive strategy where investors buy and hold regardless of what happens in the market

Mutual Funds are commonly used by mom-and-pop investors to get exposure to active management. These funds can have anywhere from hundreds to thousands of underlying stocks, brought together under one name. They are then traded under a ticker and fluctuate depending on supply and demandbut their values are calculated at set times, unlike a stock which fluctuates throughout the day.

There are positives and negatives associated with each of these types of funds. Lets start with ETFs.

In a passive investing strategy. an investor purchases an ETF and holds it, theoretically forevercome what may. The idea is that liquid markets (stocks, bonds, etc.) are simply too rational and efficient to beat so investors are better off with a return only slightly behind an indexs long-term return (due to fees).

This makes sense in theory, but can be emotionally difficult. Buying passive products is easy but so is selling them. Many investors cant help but sell off their ETFs in periods of volatility. Simply buying an ETF doesnt make you a passive investor, rather extreme disciple does. You have to define your goals, select an asset allocation and then hold on, no matter what. The means not veering from the selected index fund out of fear or greed. Shifting at other points is an active choice.

The number of investors who can do this is very small and failure at any one of these steps can hamper your financial goals. The biggest problem with passivity is the sheer emotional challenge. Most folks arent robotic enough to successfully weather all a market can throw at them.

Takeaway: Passive investing is one of the most difficult feats in investing and knowing when to choose an ETF vs a mutual fund can make a big difference during your retirement investing planning stage.