Some ETFs shift to narrow range

June 11, 2006|By ANDREW LECKEY | ANDREW LECKEY,TRIBUNE MEDIA SERVICES

Funds that trade like stocks are hotter than hot.

Assets of exchange-traded funds, or ETFs, have increased 52 percent, to $335 billion, in the past 12 months, according to the Investment Company Institute.

There are more than 230 ETFs, which were introduced 13 years ago with SPDRs, based on the Standard & Poor's 500 index. That remains the largest ETF in terms of assets.

You can trade ETFs, which often hold baskets of stocks similar to mutual funds, anytime during market hours. They have no minimum investment other than buying a single share, and there are no penalties for redeeming them, although investors do have to pay trading fees. Annual fees often are lower than similar mutual funds.

But as with any investment, what you don't know can hurt you.

A significant shift is under way, with new ETFs diverging from the original concept of replicating broad market indexes and providing diversification. Instead, they're emphasizing narrow industries, single countries or commodities.

Oil, gold, medical devices, aerospace, insurance, home construction and biotechnology are typical of these specialized ETFs.

There is a lot to like about ETFs. Because they're usually based on indexes, there is less trading, and that reduces costs. They are tax efficient, with fewer capital gains distributions.

But says Dodd Kittsley, director of ETF research for State Street Global Advisors in Boston, "The investor should first speak to a financial adviser or investment professional to devise an asset-allocation strategy, then see where ETFs might fit in to implement that strategy."

Another concern about ETFs that investors should keep in mind: Every time you buy or sell a share in an ETF, you must pay a brokerage fee. That can make them too expensive if you hope to invest in small increments on a regular basis by using dollar-cost averaging or automatic deposit.

Andrew Leckey is a Tribune Media Services columnist.

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