Leonardo da Vinci once said: “It had long since come to my attention that people of accomplishment rarely sat back and let things happen to them. They went out and happened to things.” He also is quoted as suggesting that “simplicity is the ultimate sophistication”. The second statement cancels the first when you think about investing. It’s true that you do need to take a risk and be willing to suffer the consequences of those decisions. Accomplished people will be the first to tell you that they have lost, often on numerous occasions, before they ever won.

As to the second statement: go ahead and try and do what Leonardo did. Yet everyday, we try and do what accomplished investor do. And on a regular basis, within the trading community, the mention of the sophisticated investor suggest some line between those who can and those who should not. Defining your own sophistication is much like defining your risk tolerance, albeit more elegantly.

Of late, it has been this delineation of investment style or belief that these two groups of investors exist for the benefit of the other, a sort of predator/prey relationship. To be more sophisticated, one must have the less-sophisticated to feast upon. Investing is not and never has been a mutually beneficial arrangement. One trade has two sides and one of those sides believes, without any doubt, it knows what the other side of that trade does not. The “knowledgeable investor” may be on both sides of the trade in an irony that keeps this market forever fascinating.

Perhaps one of the most obvious indication of this sophistication is the debate between exchange traded fund investors and those who use a more traditional method of growing their investments, the mutual fund investor. The two types of investments have created numerous side by side comparisons (and I am guilty in the name of financial education of having done that on more than one occasion). But they are and even when the surface is pulled back and the soft underbelly exposed, very similar.

Both are run by a manager, a sophisticated individual or team of or computer or sometimes all three, who picks an index to mimic or a sector to buy. With this in mind, they name their endeavor, crack a bottle fo champagne across the bow and set sail in the marketplace. To purchase the mutual fund, you need only to enroll in the available retirement plan at work or open and IRA with a mutual fund company. There are minimums sometimes but there is no cost to buy a certain number of shares. Reinvesting is just as easy and any gains can be reinvested as well.

The ETF is traded like a stock. Only it isn’t. And here is where the sophistication of the investor begins. Or does it? A stock always has a bid and ask price. And while an ETF does as well, the changes in those two crucial pieces of information suggest that the professional trader is even a bit confused about which price is the right price. For the un-sophisticated investor, the mutual fund investor who is wondering whether an ETF or five would be better than what they are investing in, the first alarm just rang.

The bid/ask relationship is not that hard to comprehend. A bid is exactly what it suggests: your willingness to buy a stock at a certain price that you feel is correct and the the ask is what the seller believes is right. The closer these two get to one another, the more a trader believes that what they know is a good as what the seller knows. In an ETF, something else is at work.

While the vast majority of ETFs available to investors are considered indexed, a much smaller amount exist as the indexes we can readily purchase from any fund family in the form of large cap, S&P 500 funds. ETFs have indexed not only those well-known published indexed. They have created their own. And in doing so, they have made sophisticated investors think twice. An ETF may not be able to index the sector they have chosen in part because of the illiquidity of some of the companies.

That means the the ETF is what is known as a derivative security. This should give even sophisticated investors a reason to pause. This simply means that the underlying investments are changing all-day long and because of that repricing, know one can say for sure, at any one moment in time, what the ETF is worth. The National Securities Clearing Corporation (NSCC) attempts to do this and for the most part, they can. But until the final bell rings, it is a guess at any one second. For the mutual fund investor, your investment of cash buys the exact price of what is in the fund.

Sophisticated investors, the folks who know how to win and also how to lose, understand a few things about ETFs. They trade a lot. On some days, they make up half the volume. They also have, under the plain monicker of index, sliced the market into so many chunks, unless you have very good information, and even the sophisticated don’t know all of the things about an ETF all of the time, the risk will be higher than you assume.

Sophisticated investors know that regular investing over time, the old school dollar cost averaging method employed by your 401(k) at work, works best. It’s been proven and the sophisticated trader knows this. But they ignore it and novice ETF investors will as well. It’s a stock or it trades like one and therefore, needs to be traded. These costs can strip away any beneficial comparison this investment might have had.

So if you know yourself and how to make money over the long-term, you may be more sophisticated than the ETF investor who shuns the potential risk, ignores the possible cost, and considers the relevant trading info as white noise. While mutual funds seem staid and poised for the possible dethronement, it won’t happen soon. The mutual fund investor may turn out to be the sophisticated investor after-all. Because it isn’t who makes the most money,; it is who keeps what they’ve made the longest.

For the opportunity to buy something that has an underlying portfolio that is priced throughout the day (mutual funds are priced at the close), one must open a brokerage account. Admittedly, many brokers are allowing investors free-trades in ETFs but often downplay the needed account balance to do so.