(FORTUNE Small Business) – Throughout the financial blowups of recent years (Enron, Tyco, WorldCom, etc.), mutual funds have come through relatively unscathed. But recently two scandals have hit the headlines, suggesting that even the fund industry might not be safe. In one case several funds allegedly let their big clients make low-risk trades after the markets had closed. Then, some brokers were caught reportedly holding a contest to see who could sell the most in-house funds, with prizes that allegedly included Britney Spears tickets. In both situations, individual investors found out that their own interests had been sold out.

But even if you set those examples aside, the industry's real problem is that most funds are terrible investments, for a couple of reasons. First, they cost too much. According to Morningstar, the average domestic fund charges 1.53% of assets annually. During the stock run-up of the late 1990s, such fees didn't seem significant--what's 1.5% when the fund is up 20% a year? But now that returns are back in the single digits (or negative), those expenses virtually guarantee that you'll lag the overall market.

Mutual funds are also woefully inefficient. While the fund industry encourages customers to be "long-term investors," its own managers are anything but. The turnover of the average actively managed domestic stock fund, according to Morningstar, is an eye-popping 106%. This means that managers hold their stocks less than a year. Frenetic trading like that costs you in both commissions and taxes. Come December, you could get a tax hit of unpredictable size--even if the fund lost money, and even if you didn't sell any shares.

On top of all that, many actively managed funds are essentially index funds in drag. Managers get graded against benchmark indexes like the S&P 500, so to cut down on risk, they often own the same holdings. Consider the Oppenheimer Main Street B fund. It basically mirrors the S&P 500--chart the two against each other, and the lines are nearly indistinguishable. Yet it charges its investors 1.75% annually, more than ten times the expense ratio of a typical index fund.

What's the solution? If you're a small-business owner without a lot of time to track your investments, think about exchange-traded funds (ETFs). These are essentially stock-fund hybrids--they track the performance of a specific index but trade just like stocks. They're cheaper than traditional index funds. (Barclays offers an S&P 500 version--ticker: IVV--with a fee of just 0.09%, or one-19th that of the Oppenheimer Main Street fund.) And they're tax-efficient, meaning you'll pay capital gains taxes only when you sell, and only for gains realized in your own account. More than 100 ETFs now track domestic indexes, large-, mid-, and small-cap indexes, specific industries, and other countries. Several companies offer ETFs, but Barclays Global Investors has the widest range, under the trade name iShares (ishares.com). You can also get information at Morningstar. (Go to morningstar.com and click on the ETF tab.)

Exchange-traded funds may be less sexy than regular mutual funds, but use them and you can rest easy that your portfolio won't be put at risk over Britney Spears tickets.