Hot Stuff

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.

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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.