Exchange-traded funds growing more diverse

NEW YORK -- Exchange-traded funds are still a novel idea to many investors, but the assortment of ETFs on the market is growing, with new offerings that include bonds and another in the works that tracks the Nasdaq composite index.

Currently there are 106 ETFs, compared with 80 in 2000, according to the Investment Company Institute, the mutual fund industry group that began tracking ETFs two years ago.

A cross between stocks and mutual funds, exchange-traded funds, or, ETFs, are one of the newer, faster-growing investment products on Wall Street. These days, there's an ETF to track most stock indexes, large or small, along with stocks by country, region or market sector. In July, Barclays Global Investors expanded their ETFs to cover bond indexes.

The ETF tracking the Nasdaq composite is expected to be available in early 2003.

"It is indexing to the next power. Every color, shape and stripe. Any country. Any industry. Any index," said Jordan Goodman, author of Everyone's Money Book, of ETFs.

At the same time, the competition for buyers is getting more intense. Once seen only in financial magazines, ETF ads can now be found in magazines like The New Yorker.

Prices fluctuate

Like funds, ETFs are baskets of stocks, but unlike mutual funds they are traded on a stock exchange as individual stocks are, allowing prices to fluctuate and appealing to traders who want the flexibility of being able to buy or sell at any point in a session. By contrast, mutual funds are priced once a day, after the market's close, and investors can buy or sell only at that price.

Typically, ETFs track stock indexes and are offered through a variety of well-known companies including S&P, Dow Jones, Vanguard, Merrill Lynch and Barclays.

The oldest and the biggest ETF tracks the Standard & Poor's 500 index. Called Spiders -- short for Standard & Poor's Depositary Receipts -- it began trading on the American Stock Exchange under the symbol SPY. With $33 billion in assets, there are only five mutual funds that are bigger.

Second to Spiders are Qubes, which debuted in 1999 and track the Nasdaq 100. The nickname comes from its QQQ ticker symbol. The Qubes is the most actively traded issue in the United States in terms of dollar volume. On a daily basis, 91.4 million shares of QQQ change hands. Qubes have $17.2 billion in assets.

Part of the Qubes' popularity is that were no index mutual funds to track the Nasdaq 100 until after the ETF came on the market, said John L. Jacobs, chief executive officer of Nasdaq Financial Products Services and creator of the Qubes. Now there are more than 30 mutual funds that follow the Nasdaq 100.

Jacobs and others tout ETFs for their liquidity and diversity. With ETFs, "You get the advantages of a fund: diversity and lower expenses. But it trades in real time like a stock and so you can do all the things you can do with a stock," Jacobs said.