Wall Street loves to introduce new financial products to both individual and institutional (the big guys!) investors. In our more than 40 years combined in the financial services business, we have seen some good products introduced, and some really crummy ones as well.

Many financial firms design products that they think investors need (without asking investors!) and then figure out innovative sales and marketing strategies to convince investors that they really do need them.

We have been committed over the years on radio and television and through our books to help you, the investor, tell the difference between the good, the bad and the ugly. Our commitment to that is stronger than ever here at Dolans.com, and today we want to give the scoop on a rapidly growing investment product: exchange traded funds, or ETFs as they are more widely known.

Talk about a popular new product! According to the Investment Company Institute, a mutual fund trade group, assets in ETFs have grown from $65 million in 2000 to nearly one-half trillion (with a T) dollars today.

So where do ETFs fit in the Dolans "good, bad or ugly" rating system? We say good - with cautions, which we'll talk about.

What Exactly Are ETFs?

ETFs are essentially baskets of stocks that are designed to mirror well-known indexes like the S&P 500 or the NASDAQ 100, or to track securities specific to a particular country or industry. These baskets enable us as investors to track more than 300 domestic and international indices such as healthcare, energy, gold, China, oil - even dermatology!

ETFs were originally created for use by institutions and resemble index-tracking mutual funds, but they trade just like a stock and generally charge much lower fees than a traditional mutual fund. In fact, ETFs are often referred to as "hybrid" securities, because they contain attributes of mutual funds, individual stocks and bonds.

Because ETFs track a particular index, country or sector, the stocks in which they invest are mostly pre-determined, eliminating the need for a management team to analyze and choose which stocks to buy. That's one reason most are a lot cheaper than mutual funds. In addition to lower fees, ETFs offer certain tax advantages because they do not accept or distribute cash from the underlying shares. What that means for you is that, unlike mutual funds that are taxed every year, there are no capital gains taxes distributed to you as a shareholder.

ETFs are similar to closed-end funds in that both trade like stocks on an exchange and contain both bonds and stocks. ETFs also resemble index mutual funds by tracking certain benchmarks, so they are not actively managed. Closed-end funds, in contrast, are actively managed.

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