Exchange-traded funds, also known as E.T.F.’s, have surged in popularity in recent years, and the number and types of products have proliferated.

Most E.T.F.’s are simply mutual funds pegged to financial indexes, but with an added benefit: They can be traded throughout the day just like a stock, whereas traditional mutual funds are priced only once a day, at the end of trading.

Many people like exchange-traded funds, or E.T.F.’s, for the same reasons they like index funds: they provide easy access to broad spheres of the market, while keeping costs and taxes low. In some cases E.T.F.’s are cheaper than their index-fund counterparts, but that’s not always the case.

In fact, you need to factor in what can amount to another significant cost. Since E.T.F.’s trade like stocks, you need to pay a commission each time you buy or sell shares. Commissions can range anywhere from just a few dollars per transaction to more than $50, depending on the brokerage you use and whether you trade online or pay for assistance. If you are making regular contributions over time — say, investing a certain dollar amount each week or month — buying an index fund is more cost-effective. If you are rolling over a lump sum, however, you might choose an E.T.F.

E.T.F.’s might also provide an easy for smaller investors to get started since some index funds have high investment minimums. With an E.T.F., you can buy a single share. Purchasing a broadly diversified fund with rock-bottom costs like the Vanguard Total Stock Market E.T.F. and its Total Bond Market E.T.F. is a prudent way to wade into the investing waters, especially when purchased through a discount online brokerage with low commissions.


Choosing the Right E.T.F.

Evaluating E.T.F.’s has gotten more complicated as the number of products continues to increase dramatically. The first exchange-traded fund began trading in the United States in 1993, but smaller investors began to take notice of them more recently. As a result, many financial companies have tried to capitalize on their popularity, launching E.T.F.’s that track narrower and more esoteric slices of the market, from single countries like Malaysia and Italy, to E.T.F.’s that track companies that research skin disorders.

While the breadth of new E.T.F.’s has certainly democratized the investment marketplace and provides access to corners of the market that were previously inaccessible, a vast majority of these funds — there are now about 700, up from 80 in 2000 — are not practical for regular investors. In fact, several newer E.T.F.’s could not attract enough money and have been forced to shut down.

In addition to the original index-tracking E.T.F.’s, there are now products that track commodities — like gold, silver and oil — as well as currencies, sectors and specific industries. Some E.T.F.’s even bet on the direction of the market. A word to the wise: You might as well go to Vegas and bet it all on black.

Some E.T.F.’s have abandoned the index-based model altogether and track stocks chosen by sophisticated computer models. Actively managed E.T.F.’s are also beginning to hit the market, but their strategies are largely unproven. Proponents have said that actively managed E.T.F.’s will be less costly and more tax-efficient than active mutual funds, but it is far too early to tell how they will ultimately fare.

When choosing an E.T.F., stick with well-known and time-tested providers such as Barclays Global Investors, Vanguard, and State Street. In most cases, you want to invest in the least expensive funds with recognizable indexes. It’s also wise to invest in larger funds with more assets, which means they will be easier and less expensive to trade. Investing in any fund with less than $50 million in assets is not advisable.

Finally, remember the reason investors were attracted to the original batch of E.T.F.’s., and do not stray too far afield.

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