As a passive investor, my use of ETFs has been confined to holding a large, highly liquid major ETF index while waiting for the wash rules to lapse. For example, if Vanguard Total Stock Market VTSMX was sold for tax-harvesting reasons, shares of Vanguard Total Stock Market ETF VTI could be purchased in portfolios to maintain proper exposure. After the wash rules expire, the mutual fund could be repurchased. Other than this option, passive low-cost index mutual funds are the preferred investment vehicle for client portfolios. Why?

With the exception of the largest and most liquid ETFs, the spread risk is a growing concern with the ETF structure. ETFs are bought and sold like stocks. Thus, the spreads between the bid and the ask prices represent trading costs. The larger the spread, the more money you can lose on each trade. Over time, these trading costs reduce performance. With more specialization in ETFs, smaller ETF fund assets, this could be a real trap for advisors.

Gold and commodities ETF funds are currently "hot." Advisors should beware that as new asset class ETFs are introduced to the market, more complex tax issues can arise. For example, gold ETF funds could trigger ordinary income versus capital gains.

ETFs trade frequently. These funds change hands more often than the 30 stocks held in the Dow Jones Industrial Average. Big institutional players dominate ETF activity. Further, small investors are tempted to try to beat or time the market by taking outsized risks in sectors and countries when they are hot. The buy-high/sell-low retail investor (or our clients) does not gain by trading.

Dividend income is not reinvested as with mutual funds, thereby decreasing compound returns. And mutual funds are tailor-made to dollar-cost average into; ETFs are not.

Do you provide ETFs to your clients? I look forward to your comments.