Both exchange traded funds (ETFs) and index mutual funds are noted for their low investment expenses and excellent diversification, which reduces investment risk. They both track some type of index, which is a collection of securities used to track market performance. Thus, their performance will be similar to the performance of the underlying index they are tracking.

ETFs trade on major stock exchanges and are sold by brokers. Thus, ETFs work best for deposits of large, infrequent sums of money because of the cost of brokerage commissions. Mutual funds work best for regular deposits via dollar-cost averaging and payroll deduction. Many index funds can be purchased without a sales charge through no-load mutual fund companies.

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