Dueling Fools: Mutual Funds Rebuttal

I won't say that all ETFs are bad. They aren't, and you can definitely argue that ETFs boast an advantage in tax efficiency, since they don't tend to distribute capital gains annually, as mutual funds do.

But you'll only get tax efficiency if you buy and hold your ETF as you would a fund. Too many investors don't, because of the -- ahem -- "advantages" that Zoe cites. Take short-selling. We call it "shorting," because most positions are opened and closed within weeks, or at most, months.

Shorting the NASDAQ Trust 100 Shares (Nasdaq: QQQQ  ) ? Ka-ching! That'll be two commissions, please.

What's more, many brokers allow investors to buy funds in very small chunks. Fidelity is a good example. Anyone with a Fidelity brokerage account and $500 can buy shares of its Spartan 500 Index (FSMKX) fund, which charges just 0.10% annually. There's a catch, in that you'll have to keep buying via a monthly direct deposit account, but that's hardly a bad deal. After all, regular investing leads to riches.

Finally, let's talk scandal. The Wall Street Journal recently reported that some ETF managers have begun to exert active control over their portfolios. In the process, they've created surprising ambiguity regarding which stocks their funds hold. That certainly doesn't rise to the same level as late trading -- it's not even in the same ballpark, frankly -- but it's enough for me to question whether ETFs really are scandal-proof.

Are ETFs bad? Of course not. But don't small-f fool yourself into thinking that they automatically ascend to superiority at mutual funds' expense. Only top-caliber funds let you tap into the experience of some of Wall Street's greatest investors, and they often do so for the same price -- or less -- than you'd pay a computer to run an ETF.

Now, tell me again why we're debating?

You're not done with the Duel yet! Go back and read the other entries, then vote for the winner.

Fool contributor Tim Beyers writes weekly about personal finance and investing. Have a Foolish money tip? Tell him. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. All of Tim's portfolio holdings can be found at his Fool profile. His thoughts on Foolishness and investing may be found in his blog. The Motley Fool's disclosure policy puts the "oo" in "moola."


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