Are ETFs Getting out of Control?

There's something interesting going on in the world of exchange-traded funds (ETFs), those stock-like, fund-like investments that have been growing in popularity lately. (For the basics on ETFs, what they are, and why you should consider them, drop by our ETF Center.)

So what's the fuss? Well, there may soon -- or already -- be too many ETFs out there. This has already happened with mutual funds. Consider this -- there are reportedly around 15,000 stocks in the United States, although many of them represent tiny companies. The broad-market Wilshire 5000 index includes about 5,100 firms, and that represents most of the value of the entire stock market. How many mutual funds are there? According to the Investment Company Institute (ICI), there are about 8,000 mutual funds in existence -- more than one for every two public companies out there. They've been growing in number, too. In 1996, there were only about 6,248 funds, so we've added almost 2,000 more in just the past 10 years.

Meanwhile, also per ICI numbers, there were 80 ETFs available to investors at the end of 2000, vs. 162 a year ago. There are more than 200 today. According to a SmartMoney article, 12 ETFs were launched in the first quarter of 2006, with "many more on the way." Assets in ETFs are also surging. Whereas ETFs held $156 billion in early 2004, they held $313 billion in early 2006 -- that's twice as much money in just two years.

I first became aware of ETFs as an alternative way to invest in indexes, with some advantages over traditional index mutual funds. The granddaddy of ETFs is, after all, Standard & Poor's Depositary Receipts 500 Trust (AMEX: SPY  ) , or "Spiders," tracking the S&P 500. Since then, more and more ETFs have been introduced, covering more and more indexes, and now more and more specialty niches.

Recently released have been ETFs that track the returns of both the growth and value segments of the S&P 400, 500, and 600. Morningstar (Nasdaq: MORN  ) recently launched its First Trust Morningstar Dividend Leaders Index Fund (AMEX: FDL  ) . There are ETFs focusing on specific industries, such as the SPDR Biotech (AMEX: XBI  ) and the SPDR Homebuilders (AMEX: XHB  ) . If you're interested in a specific region, you can often invest in it via an ETF, such as the iShares MSCIJapanIndex Fund (NYSE: EWJ  ) . Want emerging-markets exposure? Check out the Vanguard Emerging Markets Stock VIPERs (AMEX: VWO  ) .

What should we investors do about this proliferation? Well, we need to keep our focus while we prepare to be dazzled by ETFs for every kind of commodity, every corner of the world, every conceivable industry, and so on. Remember that for the vast majority of investors, a simple index fund will serve quite well -- and you can secure shares of one for yourself just by investing in Spiders.

But do take some time to learn more about other attractive options, and decide whether ETFs are really for you in the first place. Our ETF Center will teach you a lot. It features info on how ETFs stack up against mutual funds, how to develop an investment strategy with ETFs, pitfalls to avoid, and how to avoid ETF imposters. There are plenty of ETFs that can give you instant exposure to many emerging markets nooks and crannies.

These articles may also be of interest:

• Mutual Funds vs. ETFs
• Three Things to Know About Your ETF
• Buy the Whole Mall
• The Age of the Exchange Traded Fund
• ETFs and Falling Fund Fees

Longtime Fool contributor Selena Maranjian owns shares of the Vanguard Emerging Markets Index Fund, which is tracked by the VWO ETF. The Motley Fool has an ironclad disclosure policy.