Since the first ETF, the SPDR Trust (AMEX:SPY), debuted in 1993, ETFs have captured more than $425 billion in assets in their collective webs. In the same period, their number has grown to more than 400. New firms like WisdomTree and PowerShares are entering the market with a mind-bogglingly diverse array of exciting and creative ETFs. If you want a good place to start investing in ETFs, consider examining the managers of these funds, and trying to match your needs with their specialties.

ETF founding fathers
Although there are a number of ETF managers, most assets are run by the two founders of this market, Barclays Global Investors and State Street Global Advisor (NYSE:STT). Between them, these two firms account for three-quarters of all ETF investors' dollars. Barclays' growing market share now tops 50%, while State Street struggles to grow, currently controlling only about 25% of the market.

Barclays is the proverbial 800-pound gorilla in the ETF market, with nearly 140 different fund offerings under the iShares umbrella. Despite its reputation as a quantitative shop, it now offers ETFs of many different flavors, from broadly diversified funds to industry ETFs, along with funds based on commodities and fixed-income securities. In 2006, Barclays garnered the majority of assets flowing into ETFs, and its iShares Silver Fund (AMEX:SLV) alone took in more than $1 billion.

The iShares now have more than $225 billion in combined ETF assets. State Street is the second-largest ETF provider in terms of assets, with close to $100 billion under management in its SPDRs. State Street built its business on the strength of its cash and passive index management, which served it well in the early years of the ETF market. Now that the market is moving toward more actively managed ETFs, State Street's conservative approach to adding new products has limited its market share. In 2006, the firm was stuck in neutral, seemingly unable to gain traction with investors' dollars. With only 39 funds, the creator of SPY has been slow to add new products and more fully participate in the ETF boom.

A third ETF manager with a well-rounded growth and value series of funds is Vanguard. With its well-known mutual funds, and $20 billion in assets in 26 different ETFs, Vanguard has become a serious player in this arena as well. Happily for investors, Vanguard has brought its low-cost focus to ETFs. Its Emerging Markets ETF (AMEX:VWO) is the lowest-cost emerging-markets fund.

ETF evolution
ETF sales hit a high point in 2006, with assets rising 40% for an overall increase of $122 billion, according to the Investment Company Institute. The proliferation of funds has brought with it some new offerings that are markedly different from the older ETFs.

ETFs were designed to provide an easily traded product that tracked the returns of equity benchmarks. The original ETFs tend to be broadly diversified, based on well-known and established market-cap-weighted indexes. These funds are extremely competitive with traditional indexed mutual funds, since the ETFs have very low expense ratios, along with low turnover and high tax efficiency. Some of the newer ETFs have become much more concentrated or specialized, following unique and narrow indexes. These funds also tend to have higher expense ratios, and their turnover may not be as tax-efficient.

New players
Barclays and State Street's dominance of the ETF market may not last. A number of new firms have entered the market with innovative products, pushing ETFs to become more sophisticated and specialized. More than a dozen firms now manage ETFs, and in 2006 alone, there were more than 153 new funds added to the market. ETF managers now include well-known names such as Merrill Lynch and Vanguard, as well as the venerable Bank of New York. Other managers are lesser-known, including First Trust Advisors and Victoria Bay Asset Management.

Several ETF newcomers have distinguished themselves with their aggressive issuance of new products. ProShares and WisdomTree Asset Management were particularly prolific in their mid-2006 debuts, with 40 and 30 funds, respectively.

For more adventurous investors, ProShares offers leveraged and inverse ETFs, such as the Ultra Short QQQ ProShares (AMEX:QID), which tracks double the inverse of the Nasdaq 100's daily performance. If that approach sounds too risky, and you want to invest in tried-and-true dividend-paying companies, WisdomTree's offerings might be more your style. The company's screening process focuses on dividend payers, omitting growth stocks that don't pay dividends. WisdomTree also introduced the first ETFs to provide exposure to high dividend yields in the international small- and mid-cap markets.

Rydex Investments, which has managed ETFs for several years, introduced ETFs that provide exposure the foreign currency markets, including the euro-tracking CurrencyShares Euro Trust (NYSE:FXE).

Another fairly new ETF manager, PowerShares Capital Management, offered 63 funds at last count. That's more than State Street's lineup, but with $7.5 billion under management, PowerShares has only one-tenth the assets of its larger competitor. A number of PowerShares' new funds follow modified or tiered market-cap weighting, and they can have a small- or mid-cap bias.

The competitive forces that create so many choices for investors will undoubtedly lead to duplication and extraneous funds. Just as inevitably, a pruning process will periodically eliminate funds with few assets; several funds have already disappeared after failing to attract sufficient investor capital. Buy-and-hold investors should probably avoid trendy or extremely specialized funds, lest they risk looking for a new fund down the road.

A final exchange
The flurry of ETFs hitting the market now offers many more choices for ETF investors, and even more will undoubtedly follow. Unfortunately, all these funds make it tougher to find those that meet your investment objectives. You can make the process easier, though: Just start with an overall picture of the ETF universe, then drill down to the funds with the highest performance and liquidity, and the lowest expenses.

Fool contributor Zoe Van Schyndel lives in Miami and enjoys the sunshine and variety of the Magic City. She owns shares in SPDRs. The Motley Fool has a disclosure policy.