From the February 2002 issue of Entrepreneur

If you're a fan of both index mutual funds and individual stocks, exchange traded funds (ETFs) offer a combo worth investigating.

First introduced in the early 1990s, ETFs became popular because they're essentially baskets of securities (like mutual funds are) that are listed on the American Stock Exchange. Because mutual funds aren't listed on the exchanges, you can't trade them all day as you can ETFs.


5%
of U.S. consumers purchase stocks and mutual funds online (compared with 9% in Germany and 16% in India).
SOURCE: Taylor Nelson Sofres

Currently, there are about 100 ETFs with assets totaling more than $64 billion, according to the Investment Company Institute. Some of the most popular are Spiders (SPY), reflecting the S & P 500; Cubes (QQQ), representing the NASDAQ 100; Diamonds (DIA), reflecting the Dow Jones Industrials; and Vipers (VTI), Vanguard's Total Stock Market Index.

ETFs offer investors the ability to invest in broad-based indexes or industry-focused ones; and they carry fundlike expenses, such as annual expense ratios and dividend and capital gains tax consequences. The beauty of ETFs is, you can trade them as you would any other stock or buy and hold them, as many investors do with index funds.

While ETFs offer plenty of pluses, they're not for everyone. Nor are they risk-free. Under normal market conditions, index investing can be volatile, depending on the index, sector or industry. Add a bear market to the equation, and there's no place to hide.

:: ONLINE EXCLUSIVE ::
  • www.exchangetradedfunds.com: A solid source of information about both U.S. and international exchange-traded funds, including industry news, fund performance and more.
  • www.ishares.com: Created by Barclays Global Investors, some of the data available include performance figures, investment strategies and more.
  • www.morningstar.com: One of the most prominent investment industry sources for mutual fund investing, this site offers plenty of both fund specifics and educational information about exchange-traded funds.

Dian Vujovich is an author, syndicated columnist and publisher of mutual fund investing site www.allaboutfunds.com.