Exchange traded funds or ETF’s are easily confused with mutual funds. After all, an ETF will hold various securities just like a Mutual Fund will. As well, an ETF comes with an expense ratio, just as a Mutual Fund does. And while some mutual funds follow an index successfully, the name of the game for an ETF is often index investing at an advantageous cost.

But there are some disadvantages to an ETF when it comes to sound investment practices. For starters, and ETF is more of a “one time investment,” which means investors are unable to use the proven practice of Dollar Cost Averaging as it each time one trades an ETF, he or she will incur a trading cost, which increases total fees.

However, the key advantages to an ETF make a lot of sense for investors with the capital base to take advantage of Exchange Traded Fund benefits. And three of these benefits are as follows:

1. An exchange traded fund has the ability leverage itself, thereby increasing profits (and losses consequently) when the price moves in the right direction. The most common leveraging value is 2:1, meaning that if the class in question moves by 5% over the course of a week, the leveraged fund will move by 10%. This gives the investor the potential for doubling his or her gains compared to a mutual fund investor who is following the same asset class, index, commodity, etc..

2. Unlike mutual funds which a long positions for the most part, an ETF can be “short” certain securities, indices, commodities, etc.. This means that investors who are bearish or who have a short term bullish view can stand to gain from the markets instead of watching helplessly while their portfolios depreciate in value.

The two key benefits above require that the investor be fairly involved with their investments. While mutual funds are more of a buy and hold investments, ETF’s that are leveraged have the potential of increasing losses fairly quickly and short investments often result in losses if not properly managed.

3. You can buy and sell options on Exchange Traded Funds, allowing the investor to use leverage as well. Mutuals are not optionable, meaning that the investor gets what he or she buys. With an ETF, options can be sold to generate income or bought to increase the leverage-like characteristics of the investment. More sophisticated option strategies can also be employed to improve income and gains within the portfolio as well as reduce risks.

These three benefits to an ETF investment are important for investors who are more active and have a good capital base to get started. For investors who do not have the capital or ability to watch their investments from day to day, sticking to a long, buy-and-hold mutual fund typically makes better investment sense.

–> Learn more about whether Mutual Funds Expense Ratios Really Matter at MutualFundSite.org.

Chris has more than 17 years of financial services experience. He currently manages a website about CDL Training at Class-B-CDL-Jobs.com.