Finding an ETF Fit

Since exchange-traded funds (ETFs) entered the investment lexicon -- giving us permission to sprinkle our stock talk with words like "Spiders," "Webs," "Diamonds," and "Vipers" -- investors have been snapping them up.

Spiders (AMEX: SPY  ) , which track the Standard & Poor's 500, kicked off the trend in 1993. In the past 10 years, more than 100 ETFs have entered the scene and billions of investor dollars have followed.

Are exchange-traded funds right for your portfolio? With more ETFs coming to market all the time, more investors are likely to find that they make a good fit in the right circumstances.

ETFs, which enable investors to buy a portfolio of securities in a single share, are easy to buy, easy to understand, and add a shot of instant diversification to any portfolio. There are ETFs that track everything from bond indexes to the Nasdaq to technology companies to France (well, France's MCSI Index under the ticker symbol EWQ).

Fools like the low-cost, tax-efficient nature of ETFs. Annual expenses range between 0.1% and 0.65% and are deducted from dividends. ETFs offer a sane way to add diversification to a portfolio because they enable investors to bypass the fees associated with actively managed mutual funds. Since they are bought and sold just like a stock, you must have a brokerage account.

But they're not for everyone. We don't recommend buying small amounts on a regular basis since you'll pay a commission each time you make a transaction.

To see if an ETF would be right in your portfolio, check out the ins and outs in our 60-second ETF overview.


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