ETF or mutual fund, investing about $3000 or so : Personal Finance

ETFs and Mutual Funds are basically the same animal with slightly different designs. They are both "funds of stocks" where you buy into the fund and get the entire basket of underlying stocks as the underlying value. The main differences are in how you buy them and how you pay taxes on them.

Buy
ETF: in discreet units, just like shares of stock. You buy 100 shares of XYZ for $30, you invest $3000 (plus whatever the commission is).
Fund: in dollar amounts - you simply write a check for $3000 for fund XYZ01. Always go with "no-load" (i.e. no commission) funds - in today's financial markets there is no point in paying mutual fund commissions.

Capital gains taxes
EFT: you pay capital gains taxes only when you sell the actual shares you bought. So, you buy 100 shares (as above) and hold them for a lonnnnnng time - no taxes until you sell.
Fund: you pay capital gains taxes as they occur. If you fund manager goes "hog wild" and sells everything in the fund and buys all new stocks, you'll owe capital gains taxes that year.
Thing to note: over time, you still pay taxes on all your gains, it's just a matter of "pay me now, pay me later".

Dividends
No difference really. You pay taxes as dividends are paid. Most mutual funds will allow (and default) to reinvesting the dividends. ETF generally do not (although some brokers will do it for your - at a price).

Fees
ETFs on average have lower fees, but there are lots of good funds with low fees (usually index funds). All else being equal (same type of fund, same market segment) lower fees are better obviously.

Edit: ETFs are more flexible in that, yes, you can buy as little as you want (mutual funds usually have min amounts, although with $3000 you're fine). You can also trade in/out whenever you want, however that is NOT advised - funds (ETFs and mutual funds) are meant to be long term investments. Some mutual funds will charge a fee if cashed out before a certain holding period (usually 30 to 90 days).

Source: http://www.youneedabudget.com/forum/personal-finance-f9/etf-mutual-fund-investing-about-3000-t20205.html

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