A very hot commodity on Wall Street these days is the ETF, which stands for "exchange-traded fund." According to the folks at TrimTabs.com, stock-based ETFs took in a whopping $54.4 billion in 2004, up from $15.1 billion in 2003 and more than 2000's previous record of $42.5 billion.
Gobbling about 30% of the pie were global and international ETFs, which took in nearly $16 billion, more than twice year-ago levels. Small-cap ETFs surged, with the Russell 2000 iShares (AMEX:IWM) taking in $2.2 billion, up almost 50%, and the S&P Small Cap 600(AMEX:IJR) up 85% with $1.7 billion.
Domestic stock ETFs grew by 30%. Arguably the most well-known ETF, Standard and Poor's Depositary Receipts (AMEX:SPY) (also known as "Spiders"), grew by $7.7 billion (note that that's fully 14% of the total ETF inflows), up 17%. The next biggest winner was the Dow Jones Select Dividend(NYSE:DVY), with $3.9 billion, increasing its value eight-fold.
So what's all the excitement about? Well, ETFs are interesting beasts, part stock, part fund -- like the Minotaur (half man, half bull) or El Camino (part car, part truck). Whereas many funds have minimum initial investment amounts that can present obstacles for some investors, you can buy as little as a single share of an ETF through your brokerage -- though it's not always smart to do so if your commission cost will amount to a large fraction of your investment. ETFs generally sport lower costs and greater tax efficiency. You can even short ETFs.
There are disadvantages to ETFs, too -- like the cost of trading commissions, if you plan to invest frequently or in small amounts. Learn more about ETF pros and cons in our ETF Center, and in these articles:
While ETFs are useful tools, you may find that mutual funds are a better fit for you. For some outstanding mutual fund recommendations, try our Champion Funds for free!
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.