PHOTO: Shutterstock/CNNMoney
Now playing
01:15
Volatility is nothing new. We've just been spoiled.
Now playing
01:35
Strategist: Congress will likely trim Biden's stimulus bill
roger mcnamee fb capitol markets now_00013227.png
roger mcnamee fb capitol markets now_00013227.png
Now playing
03:07
Early Facebook investor: Sandberg's denial of Facebook's role is 'laughable'
Democratic presidential candidate and former US Vice President Joe Biden speaks on the state of the US economy on September 4, 2020, in Wilmington, Delaware. (Photo by JIM WATSON / AFP) (Photo by JIM WATSON/AFP via Getty Images)
Democratic presidential candidate and former US Vice President Joe Biden speaks on the state of the US economy on September 4, 2020, in Wilmington, Delaware. (Photo by JIM WATSON / AFP) (Photo by JIM WATSON/AFP via Getty Images)
PHOTO: JIM WATSON/AFP/Getty Images
Now playing
02:02
Why Wall Street is hopeful about Biden despite economic challenges
PHOTO: Shutterstock
Now playing
02:54
Strategist on bitcoin: Pullback is very expected
Democratic candidates for Senate Jon Ossoff (L), Raphael Warnock (C) and US President-elect Joe Biden (R) bump elbows on stage during a rally outside Center Parc Stadium in Atlanta, Georgia, on January 4, 2021. - President Donald Trump, still seeking ways to reverse his election defeat, and President-elect Joe Biden converge on Georgia on Monday for dueling rallies on the eve of runoff votes that will decide control of the US Senate. Trump, a day after the release of a bombshell recording in which he pressures Georgia officials to overturn his November 3 election loss in the southern state, is to hold a rally in the northwest city of Dalton in support of Republican incumbent senators Kelly Loeffler and David Perdue. Biden, who takes over the White House on January 20, is to campaign in Atlanta, the Georgia capital, for the Democratic challengers, Raphael Warnock and Jon Ossoff. (Photo by JIM WATSON / AFP) (Photo by JIM WATSON/AFP via Getty Images)
Democratic candidates for Senate Jon Ossoff (L), Raphael Warnock (C) and US President-elect Joe Biden (R) bump elbows on stage during a rally outside Center Parc Stadium in Atlanta, Georgia, on January 4, 2021. - President Donald Trump, still seeking ways to reverse his election defeat, and President-elect Joe Biden converge on Georgia on Monday for dueling rallies on the eve of runoff votes that will decide control of the US Senate. Trump, a day after the release of a bombshell recording in which he pressures Georgia officials to overturn his November 3 election loss in the southern state, is to hold a rally in the northwest city of Dalton in support of Republican incumbent senators Kelly Loeffler and David Perdue. Biden, who takes over the White House on January 20, is to campaign in Atlanta, the Georgia capital, for the Democratic challengers, Raphael Warnock and Jon Ossoff. (Photo by JIM WATSON / AFP) (Photo by JIM WATSON/AFP via Getty Images)
PHOTO: JIM WATSON/AFP/Getty Images
Now playing
02:11
Economist: Even with a blue wave, Biden's tax ambitions could stall
FILE - The New York Stock Exchange is seen in New York, Monday, Nov. 23, 2020.   Stocks are ticking higher on Wall Street Wednesday, Dec. 23,  following a mixed set of reports on the economy.   (AP Photo/Seth Wenig)
FILE - The New York Stock Exchange is seen in New York, Monday, Nov. 23, 2020. Stocks are ticking higher on Wall Street Wednesday, Dec. 23, following a mixed set of reports on the economy. (AP Photo/Seth Wenig)
PHOTO: Seth Wenig/AP
Now playing
02:07
Dow falls on first trading day of the year
Now playing
01:02
Scaramucci: Bitcoin is due for a correction
Now playing
05:05
MoneyGram CEO: Our digital platforms are driving growth
PHOTO: CNN
Now playing
04:34
Airbnb CEO: People still yearn to travel
NEW YORK CITY- MAY 12: People walk through a shuttered business district in Brooklyn on May 12, 2020 in New York City. Across America, people are reeling from the loss of jobs and incomes as unemployment soars to historical levels following the COVID-19 outbreak. While some states are beginning to re-open slowly, many business are struggling to find a profit with the news restrictions and a population that is fearful of the contagious virus.  (Photo by Spencer Platt/Getty Images)
NEW YORK CITY- MAY 12: People walk through a shuttered business district in Brooklyn on May 12, 2020 in New York City. Across America, people are reeling from the loss of jobs and incomes as unemployment soars to historical levels following the COVID-19 outbreak. While some states are beginning to re-open slowly, many business are struggling to find a profit with the news restrictions and a population that is fearful of the contagious virus. (Photo by Spencer Platt/Getty Images)
PHOTO: Spencer Platt/Getty Images
Now playing
02:22
Economist: It's going to take years for jobs to recover
Now playing
01:29
Chewy's CEO expects growth to continue post pandemic
Now playing
02:04
These pot stocks are poised to win big under Biden
Specialist Patrick King works at the New York Stock Exchange on Monday, Nov. 23, 2020. Stocks rose in early trading Monday after investors received several pieces of encouraging news on COVID-19 vaccines and treatments, tempering concerns over rising virus cases and business restrictions.  (Nicole Pereira/New York Stock Exchange via AP)
Specialist Patrick King works at the New York Stock Exchange on Monday, Nov. 23, 2020. Stocks rose in early trading Monday after investors received several pieces of encouraging news on COVID-19 vaccines and treatments, tempering concerns over rising virus cases and business restrictions. (Nicole Pereira/New York Stock Exchange via AP)
PHOTO: Nicole Pereira/New York Stock Exchange/AP
Now playing
02:15
Dow crosses 30,000 mark for the first time ever
The Federal Reserve is seen in Washington, Monday, Nov. 16, 2020. President Donald Trump
The Federal Reserve is seen in Washington, Monday, Nov. 16, 2020. President Donald Trump's unorthodox choice for the Federal Reserve Board of Governors, Judy Shelton, could be approved by the Senate this week, according to Majority Leader Mitch McConnell's office. (AP Photo/J. Scott Applewhite)
PHOTO: J. Scott Applewhite/AP
Now playing
03:39
Alan Greenspan on the Fed's pandemic response
Now playing
02:54
GoodRx Co-CEO says Amazon Pharmacy isn't a competitor
(CNN Business) —  

What is the difference between index ETFs and mutual funds? Which is better and why?

Good question. Passively managed exchange-traded funds that track big indexes like the SPDR S&P 500 ETF (SPY) and Invesco QQQ Trust (QQQ) for the Nasdaq-100 have become all the rage lately.

With one ETF, you can own small stakes in most of America’s biggest companies. That allows you to take part in the market’s overall growth instead of trying to pick individual winners and losers.

ETFs also trade like stocks, with prices updating throughout the day, while mutual funds trade only once a day at the end of the trading day.

The risks of owning ETFs

Many ETFs have outsized exposure to the so-called FAANG stocks: Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Google owner Alphabet (GOOGL). Microsoft (MSFT) is another top holding in most ETFs.

“You have to know what you own. The S&P is now heavily weighted to the FAANGs and big cap tech in general,” said Carlos Dominguez, chief investment officer of Miami-based Element Pointe Advisors.

In other words, if you’re buying a SPDR or Nasdaq ETF because you want to be diversified, you aren’t really achieving that goal.

That may not be a problem for a lot of investors though.

Jim Smigiel, chief investment officer of non-traditional strategies at SEI Investments, said that for longer-term investors who want to buy and hold stocks in order to match the broader market’s returns, a blue chip index ETF makes sense.

“Passive investing works for highly developed and liquid markets. When an investor is thinking about a passive investment, they really want to just replicate the overall market’s gains,” Smigiel said.

Still, Smigiel notes that the current bout of stock market choppiness due to US-China trade concerns and a slowing global economy should have investors considering actively managed mutual funds with a track record of picking individual stocks that will beat the broader market.

“When megacaps drive the entire performance of the market as they have for the past few years, it’s difficult for an active manager to beat Apple, Microsoft and Google. But given the current volatility, now should be a good time for active managers,” he said.

The risks of owning actively-managed funds

Experts say actively managed mutual funds are also a better option for investors considering more exotic securities like high-yield bonds as a way to diversify their portfolios.

There are ETFs these days for pretty much every asset class. But buying one blindly instead of relying on an expert that handpicks individual securities could be a recipe for disaster.

“The underlying problem is the lack of research most investors do before investing in junk bonds. They prefer to buy a high-yield bond exchange-traded fund, thinking that’s a safer strategy. It’s not,” said Leon Wilfan, chief investment strategist with Lahardan Financial.

“How is a bag of rotten apples better than a single rotten apple? Either way, you end up hungry. When you buy into an ETF, you may think you’re spreading out your risk across hundreds of high-yield bonds. In fact, you’re buying a bagful of rotten investments,” Wilfan added.

Don’t forget about mutual fund management fees

At the end of the day though, a combination of active funds and passive ETFs is a good mix for most investors. Element Pointe’s Dominguez said that one reason why investors have flocked to ETFs is because they aren’t as expensive as mutual funds.

Dominguez notes that investors have to look at more than just a fund’s performance history when considering whether to invest with an active manager. If the manager is charging exorbitant fees, that can eat into your returns. ETFs tend to cost much less.

“You need a combination of active versus passive investments,” Dominguez said. “The problem with active funds is that you can outperform by picking good stocks. But once you tack on management fees, it’s hard to beat a broader market ETF.”

What’s the best way to invest for the long haul? Are bonds better than stocks? Do you have questions about how to build wealth? Ask us here and you may be included in a future column.