How to Cash in on the ETF Craze

• »

Although exchange-traded funds (ETFs) aren't new to the investment world, their recent growth in the industry has truly become a phenomenon. But just what is an ETF, and how did they get started? And, more importantly, how can you use them in your portfolio?

ETFs are equity funds that track a specific market index, yet can be traded like a stock. They are essentially a basket of securities that make up a given index, such as the S&P 500 (SPX). In fact, the first ETF ever issued was the Standard and Poor's Deposit Receipt, or the SPDR S&P 500 (SPY), which began trading in 1993.

The great thing about ETFs is that they are much more tax-efficient than traditional mutual funds, as there is virtually no internal buying and selling going on in an index. And because they track an index, their expense ratios and transaction costs also are quite low. Plus, there are no sales loads charged for ETFs.

Next: Freedom of Choice, Is What You Got