Once a niche product known to few investors, exchange-traded funds (ETFs) are now among the most popular ways to invest through brokerage accounts. Like mutual funds, ETFs let you invest in portfolios holding hundreds or even thousands of stocks, bonds, or other assets.

While mutual funds once dominated, ETFs now represent around one-third of U.S. fund assets and are gaining ground steadily. According to Morningstar, ETFs had over $10 trillion in U.S. assets by the end of 2024 and are on pace to surpass mutual funds in a few years.

This topic deserves more than a brief mention, so I’m covering ETFs across two columns. Today: what I love about them. Next month: their lesser-known downsides.

They’re generally low cost — and getting cheaper

One reason ETFs are so popular is their rock-bottom expenses. While not every ETF is cheap, they tend to cost less on average than mutual funds. For instance, the Vanguard Total Stock Market ETF (VTI) charges just 0.03% per year — about $3 annually for every $10,000 invested.

As cost pressure builds across the market, the U.S. stands out globally as a low-cost venue for investors. And importantly, study after study has shown that lower-cost investments tend to outperform higher-cost ones over time.

They’re portable, not proprietary

Mutual funds are often tied to one firm, making them difficult to move between advisers or brokerages. In some cases, you may have to sell your holdings — possibly triggering capital gains in taxable accounts. ETFs, on the other hand, are brokerage securities and are easily transferable between custodians. If you switch providers, your ETF holdings go with you.

That flexibility is especially valuable for investors who don’t want to be locked into a single firm or adviser.Fee-free trades plus automation

ETF trading has become nearly as frictionless as mutual funds. Major brokers now offer commission-free ETF trades. Most also support automatic dividend reinvestment and recurring purchases — features that used to be exclusive to mutual funds. This means it’s easier than ever to set up a long-term, disciplined investment strategy using ETFs.

They’re tax- efficient by design

ETFs generally distribute far fewer capital gains than mutual funds. Thanks to something called “in-kind redemption,” ETFs can remove appreciated securities from the fund without triggering a taxable event for shareholders. As a result, investors who hold ETFs in taxable accounts typically face fewer surprise tax bills — especially compared to active mutual funds with high turnover.

There’s an ETF for almost everything

Each week seems to bring new ETF offerings. Whether you want exposure to international small growth stocks, a ladder of investment-grade bonds, or a diversified portfolio of sustainable companies, chances are there’s an ETF for it. The breadth and depth of the ETF market today makes it easier for investors to build customized portfolios using low-cost, transparent tools.

One final note: for U.S. citizens living abroad, ETFs may be easier to hold than mutual funds, which can trigger additional tax reporting or even be blocked by certain custodians.

While I believe ETFs offer many compelling advantages, the news isn’t all rosy. In my next column, I’ll explore some of the pitfalls and frustrations to watch out for as you wade into the ETF waters.

David Gardner is a certified financial planner and is admitted to practice before the IRS. He recently retired from an independent investment advisory firm and continues to write about financial topics. As financial planning is only possible after knowing the client, the column is not intended to be personal financial or tax advice. Data presented is believed to be accurate at the time of writing.