From the January 2006 issue of Entrepreneur

Exchange-traded funds, or ETFs, are hot. Around for almost 15 years, these index-like investments have finally caught on like wildfire with investors, and for good reason: They trade like stocks, are inexpensive to own and offer plenty of choices requiring no long-term investment commitment.

Each ETF represents a basket of securities: Some are broad-based and index-related, like the popular Nasdaq-100 Index ETF; others are country-, industry- or sector-specific, such as Vanguard's Energy VIPERS. ETFs may be used as core investment holdings; for portfolio diversification; for hedging; or for cash management, rebalancing or tax-loss strategies. Plus, annual expenses are only about 25 basis points a year (or 0.25 percent).

Before investing, do some research, then ask yourself: Do I want ETFs to be my core investments, or to act like accessories to fill in various sector needs? In case you're wondering, most pros think ETFs are a great way to diversify their clients' assets across various asset classes. You can start your research at www.amex.com, www.ishares.com, www.streettracks.com and www.vanguard.com.

ETFs can jazz up your portfolio, but they aren't risk-free. Also, keep in mind that market performance runs in cycles. Be sure to consult your financial advisor to find out if and when ETFs are right for you.

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