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The mercury's rising on exchange-traded funds.

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This story appears in the January 2006 issue of Entrepreneur. Subscribe »

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).

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