From what I've seen there's virtually no difference. ETFs can stray a bit from underlying assets, but really not much. Fees seem to be a tiny bit lower. I like Vanguard's VTI, their total stock market index ETF.
If you get an ETF do enable DRIP (dividend reinvestment). I think that may be what you were thinking of when thinking about taxes.
ETF pros:
Much much lower minimums to invest than mutual funds (1 share s usually $20-$150 vs. Vanguard's minimums that can be $1000-$5000)
Lower expense ratios. VTI gives expense ratios less than Admiral's Mutual fund shares but only takes $100 to get started.
Very easy to select from many funds from different investment companies through one brokerage account.
A number of banks and brokerage firms are offering perks for having large ($25k-$100k+) balances with them, like cash bonuses, frequent flyer miles, free ATM withdrawals for your checking account, free safe deposit boxes and other perks. Vanguard won't give you that.
ETF cons:
Have to buy a whole number of shares. If you have $10,000 to invest and shares of an ETF are $110, you can only buy 90 shares, leaving you with $100 of uninvested cash. Usually not a problem as you can put that little bit in some other fund or move an extra $10 from your checking account in. You can obtain fractional shares when stocks pay dividends using DRIP. DRIP is offered for free on big index funds from major brokers.
All in all it's not going to make a huge difference, but with the low minimums, lower fees and choices I like ETFs more.
