Investors should populate their portfolios with both exchange-traded funds and index funds to make it well diversified, and at the same time keep operating costs low, The Wall Street Journal reports.
By using both, a portfolio is exposed to all the asset classes, as per Chip Roame a managing principal at California-based Tiburon Strategic Advisors.
"In certain instances, ETFs make more sense. In certain instances, index funds make more sense," he told The Journal.
Because ETFs are bought and sold like stocks, they are beneficial in certain situations. Because of their tax efficiency, there are times where ETFs are the better pick. ETFs are also good for investors with large amounts to be invested.
Some companies have created ways to offer ETFs in 401(k) plans that save participants money by packaging trades together. One example is ShareBuilder Securities Corp., which has an investment plan that save participants between $21 and $24 every time they trade.
On the other hand, the case can sometimes be made for index funds because those who trade ETFs must pay commissions, which can considerably erode an investment. An index fund has the capability of re-investing its quarterly dividends. Also, additional profits can be made off of them by lending securities, something ETFs cannot do.