The first big difference between ETFs and mutual funds is how they are traded. ETFs are bought and sold over exchanges, like stocks, at any time during the trading day. Mutual fund shares can only be bought from or sold to the mutual fund company, and only at that day’s closing price. On top of that, there are no minimum ETF purchases, as there are with many mutual funds. But and it’s a big but every time you buy or sell shares in an ETF, you will incur brokerage fees, and that can cut deeply into your investing dollars.

Another difference is the fees and how they work. Sometimes you’ll fare better with an ETF, and other times you’ll have lower expenses with an index mutual fund. ETFs will often have lower expense ratios because they’re designed to incur minimal operating costs. That doesn’t mean they will always post lower expenses. While the lowest-expense ETFs charge about 0.07 percent fees, there are plenty that charge much more. In fact, some charge as much as 0.50 percent, which is higher than the average index mutual fund charges. As with mutual funds, though, you need to read through the ETF’s fund information to find out exactly what fees are charged to shareholders. And while many mutual funds come with no load (meaning no sales commission), ETFs must be bought through a broker, and that means a commission of some sort.

Because of the high trading cost, ETF investing makes more sense when you’re making bigger purchases. If you have a $7 trading fee, and you buy $50 worth of ETF shares, you’re losing 14 percent of your investing dollars. If you invest $700 in ETF shares, that $7 takes up only 1 percent of your investment, for a lower effective fee.

Income tax impact is another big difference between ETFs and index funds. Because of the way they’re set up, ETFs don’t have the internal capital gains issues that index funds do. When index mutual funds rebalance their portfolios, investors get tagged with the capital gains resulting from the sale of holdings. ETFs, on the other hand, use a different process to rebalance called creation/redemption in kind, which means that you won’t be hit with a tax bill as no security sale has occurred. Bottom line: ETFs create fewer taxable events than mutual funds, and that means you get to keep more of your money. (Of course, whichever type of investment you hold, when you sell your shares for a gain, you will be hit with the capital gains tax.)

Transparency is another area where ETFs hold the advantage over mutual funds. Investors can always see exactly which stocks are being held by their ETF. This is in stark contrast to mutual funds, which are only required to report their holdings twice a year. Why does this matter? Knowing exactly which securities your funds are holding makes it much easier for you to avoid fund (or portfolio) overlap, meaning you won’t be holding the same securities in two different funds (or in a fund and singly in your portfolio).