THAT large numbers of Americans should start investing in diamonds might seem, to the rest of the world, odd but at least plausible. That they also put their money into qubes is more mysterious. Their recent penchant for spiders and webs, however, demands explanation—not least because big names in the investment industry now plan to peddle such creatures to Europeans as well.

These exotic-sounding products belong to a class of investments known as “exchange-traded funds” (ETFs)— or simply “i-shares”, since they give investors immediate access to a stockmarket index. Thus “spiders” (“Standard & Poors Depositary Receipts”) are shares that represent the S&P 500 index; “diamonds” the Dow Jones Industrial Average (ticker symbol “DIA”); “qubes” the Nasdaq 100 (“QQQ”); and “WEBs” any of a range of “World Equity Benchmarks”—related to different stockmarket indices and averages.

While some of these, such as “spiders”, have been around for years, it is only recently that interest in them has soared (see chart). “Spiders” are now the most-traded shares on the American Stock Exchange. Barclays Global Investors, the world's largest institutional money manager, has already spun 30 of its “WEBs”. So popular have ETFs become that it plans in the next few months to launch 51 more in America. And it is now in talks with the London Stock Exchange on launching the first European versions later this year. The Frankfurt stock exchange is understood to entertain similar ideas.

What makes ETFs such an appealing way of investing in an index is that they are neither mutual funds nor investment trusts. To the uninitiated, this might seem a mind-numbingly technical distinction. But it means that ETFs, in effect, eliminate the main drawbacks of the two most common vehicles for “passive”—index—investing.

Take, for instance, mutual funds, or “unit trusts”, as they are known in Britain. These are “open-ended” vehicles, meaning that every time an investor puts money in, the fund issues him new shares, and every time he takes money out, the fund redeems some. This has two drawbacks: a fund's net-asset value is quoted— and so investors can buy or sell—only once a day. And even investors who do no selling at all may incur capital-gains taxes, if redemptions force the fund manager to sell some shares.

“Closed-end” funds, usually known as investment trusts, by contrast, pose other problems. Like other corporate entities, they issue a fixed number of shares, which investors can then trade on an exchange. So pricing and trading is continuous throughout the day, but there is a catch: temporary mismatches in supply and demand of the shares can result in hefty premiums or, more usually, discounts to the trust's net asset value. It is enough to turn retail investors off.

Enter ETFs: because they are shares traded on a secondary market, dealing is continuous (which is not just an attraction for day-traders). And, like other shares, but unlike mutual funds, they can be bought on margin (ie, for an initial downpayment) or sold short (ie, borrowed and sold in the hope that the price will fall) which allows much more sophisticated trading strategies.

At the same time ETFs also retain some features of open-ended funds. Market makers can, for instance, settle trades using the underlying shares rather than cash. This should, in theory, prevent discounts or premiums to the fund's net asset value. It also cuts down on taxable capital gains.

Admittedly, the details are awfully complicated. Still, in America more and more investors are deciding that ETFs are a more flexible and tax-efficient way of investing, even without understanding them entirely. For the industry this may have far-reaching consequences. Not only does it give yet more impetus to the trend towards indexing. But it also contributes to blurring the line between retail and wholesale investors, since it gives small-timers the same price information and market access as huge pension funds.

That said, ETFs will also create headaches for firms that offer the traditional index funds. In principle, though, they should be able to parry any threat by ETFs to old-style funds simply by starting to sell both. After all, if i-share, so can he.