Due to the generally passive nature of indexed strategies, the internal expenses of most ETFs are considerably lower than those of many mutual funds. Of the more than 900 available ETFs listed on Morningstar in 2010, those with the lowest expense ratios charged about 0.10%, while those with the highest expenses ran about 1.25%. By comparison, the lowest fund fees range from .01% to more than 10% per year for other funds.

Another expense that should be considered are the product acquisition costs, if any. Mutual funds can often be purchased at NAV, or stripped of any loads, but many (they are often sold by an intermediary) have commissions and loads associated with them, some of which run as high as 8.5%. ETF purchases are free of broker loads.

In both cases, additional transaction fees are usually assessed, but pricing will largely depend on the size of your account, the size of the purchase and the pricing schedule associated with each brokerage firm. Clients of advisors who hold institutional accounts tend to benefit from lower trading costs, often as low as $9.95 per ETF purchase or $20 for mutual funds. Additional cost considerations should be given if you plan to use dollar-cost averaging to buy into the funds or ETFs, because frequent trading of ETFs could significantly increase commissions, offsetting the benefits resulting from lower fees.

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