ETFs are not traditional mutual funds but are often compared with them for investment purposes. Exchange-traded funds are, as their name suggests, traded on stock exchanges. Most represent shares in the companies that make up a recognized index.

The first such fund, Standard & Poor's Depository Receipts (SPY), commonly referred to as a SPiDeR, launched in 1996. Their increasing popularity among investors stems from certain advantages over mutual funds. They're priced throughout the day; options can be written on them; they can be sold short; and they have no minimum investment amount beyond the price of the individual share.

The ETF structure is also considered more tax-efficient than mutual funds because they limit the exposur to capital gains distributions that can occur when fund managers are forced to sell securities to meet redemptions.

Some of them also have lower expense ratios than comparable mutual funds. However, unlike mutual funds with structured sales loads, investors must pay individual transaction fees or commissions to brokers when they purchase exchange-traded funds.

ETF shareholders are subject to risks similar to those of holders of other diversified portfolios. A primary consideration is that the general level of stock or bond prices may decline, thus affecting the value of an equity or fixed income exchange traded fund, respectively. This is because an equity (or bond) ETF represents interest in a portfolio of stocks (or bonds). When interest rates rise, bond prices generally will decline, which will adversely affect the value of fixed income ETFs. Moreover, the overall depth and liquidity of the secondary market may also fluctuate. An exchange traded sector fund may also be adversely affected by the performance of that specific sector or group of industries on which it is based.

International investments may involve risk of capital loss from unfavorable fluctuations in currency values, differences in generally accepted accounting principles, or economic, political instability in other nations.

Although exchange traded funds are designed to provide investment results that generally correspond to the price and yield performance of their respective underlying indexes, the trusts may not be able to exactly replicate the performance of the indexes because of trust expenses and other factors.