Should average investors try ETFs?

If you've dabbled in the market, you may have heard of ETFs, or exchange-traded funds. They are, to put it simply, index funds -- which hold a basket of investments -- that trade like stocks. And they've become hugely popular in recent years because they're low cost and allow investors to easily diversify. But are they the best option for you? I'm Jean Chatzky, and this is Bankrate Bottom Line.

ETFs aren't the right choice for every investor. But they have several advantages: They carry low fees, as I mentioned. And they don't have the high minimum investments that some other mutual funds require, meaning you can buy in with a small amount of money.

Now for the negative: Because they are traded like stocks, with many ETFs, you'll be charged a commission each time you make a purchase. That means dollar cost averaging -- a strategy of investing on a regular, typically monthly, basis -- doesn't pay off here.

Bottom line: ETFs are great if you have a chunk of money you need to invest one time. But if you're going to be adding to that investment on a regular basis -- say, with contributions to your 401(k) -- you're better off with a similarly inexpensive index fund.


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