Active trader = ETF
Passive investor = ETF or IMF
Passive investor w/o future purchases = ETF
Passive investor w/future purchase = IMF

Part of this depends upon the amount of the ongoing investments, but for most that are doing $50, $100, or even $200 each month or pay period, mutual funds offer cost savings over ETFs.

To Steve’s point about being able to ‘react’ to major events, I’d say that’s a personal preference. The overwhelming majority of academic research favors Nickel’s more passive strategy and I would argue that changes in one’s personal situation are far more relevant to shifts in investment allocations than any market forces.

Active traders love ETFs, passive investors can love them too…if it saves them money.

@Manshu – while you could buy one share of an ETF and avoid an investment minimum in some funds, it’s also important to consider the cost of the trade to buy a single share. I’ve been very impressed with the efforts of Zecco, TradeKing, and Sharebuilder to deliver ETFs and other securities at a very low cost. However, they’re still not zero.

In addition, there are plenty of quality mutual funds both actively and passively managed that waive minimums in exchange for systematic contributions of $25 to $100 per quarter.

@Nickel – good topic, and love the Bernstein reference. Oh, and enjoy the Admiral share class…it’s nice.

I think you have to use the proper tool given your own situation. There is nothing inherently bad about actively managed funds.

Are they more expensive? Yes.

Do they outperform ETF’s? Many do.

For a long-term buy and hold (something I’m not a fan of) the ETF is pretty attractive.

For someone who is more active (like myself), it doesn’t matter. All I care about is return and I make my decisions based on that.

P.S. You’re correct on the title — I used “index fund” as a shorthand for index mutual fund, but since the “F” in ETF stands for fund, it’s kind of confusing. I’ll correct it.

I’m convinced an ETF is always better than the mutual fund. They give the investor more control. If you have self-control, you can do everything through an ETF as you can in a mutual fund, but and sell only at the end of the day if you want to mimic the mutual fund.

Here’s the one thing that convinces me of always using an ETF over a fund -> if some major event happens in the middle of a day, you can react. When September 11 happened, you could have immediately sold off your portfolio rather than have to wait until the end of the day and been last in line.

Also, I like seeing exactly what I’m buying at and the total costs, etc, which you can do in a brokerage. With a mutual fund you usually have to wait until the next day to see your transaction report and the result.