Money Tip
New Intrigue in ETFs

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By Dayana Yochim
June 13, 2002

Spiders and Webs, Diamonds and Vipers -- the glamorous world of exchange-traded funds (ETFs) is ready for a splashy entrance by Bond.

No, not James. We're talking about the addition of fixed-income ETFs. Since the topic lacks the oomph of some other investments, we needed to add a bit of drama. (Sorry, the new ETFs haven't yet been named. Our suggestion: JAMES BOND -- Just A Moderate, Easy Strategy Based On No Drama.)

In late May, the Securities and Exchange Commission approved the first ETFs to track fixed-income indexes. As early as July, they will be added to the more than 100 ETFs that track domestic and international stock indexes. There will be seven new exchange-traded bond funds from Barclays, according to a report from CBS Marketwatch. Four will be based on U.S. Treasury bond indexes, and three will be based on investment-grade government and/or corporate bond indexes.

ETFs have become very popular with investors as of late. (Here's a comprehensive FAQ on these vehicles.) The funds attracted $31 billion in net new assets during 2001, compared to $32 billion for stock mutual funds. The combined assets of the nation's ETFs were $85.9 billion in April 2002, according to the Investment Company Institute, the national association of the investment company industry.

Fools like the low-cost, tax efficient nature of ETFs. They offer a sane way to add diversification to a portfolio because they enable investors to bypass the high fees associated with actively managed mutual funds. Since they are bought and sold just like individual stocks, you must have a brokerage account if you want to add ETFs to your portfolio. But we don't recommend buying small amounts on a regular basis since you'll pay a commission each time you make a transaction.

As you can see in her profile, Dayana Yochim's favorite stock is SPY � and not just because it's a cool ticker symbol. No need to snoop around for the Fool's disclosure policy.