ETF's Rival Mutual Funds

Feb. 5 -- After more than a decade, exchange-traded fundsare finally gaining mainstream acceptance, and in some cornersthey're even being touted as an alternative for mutual fundinvestors exasperated by the industry's trading scandals.

Fans of ETFs love them because they're cheap and tax efficient,and in many cases can help streamline the investing process. Butthey probably aren't the best choice for people with smallerportfolios who want to regularly add to their investments or makeshort-term trades.

Big Finish in 2003

ETFs, which are similar to index mutual funds in that they trackspecific groups of stocks, had their biggest month ever inDecember, with net inflows of $12.75 billion. Total assets for theyear were $150.98 billion, largely due to market gains, accordingto the Investment Company Institute, the fund industry's tradegroup. That's still only about 2 percent of the estimated $7.4trillion held by mutual funds, but ETFs are poised to gain agreater market share as more money managers become comfortable withthem.

The main difference between index mutual funds and ETFs is thatETFs are traded like stocks: Their share price changes throughoutthe trading day, they can be sold short and bought on margin.Traditional mutual funds are priced once a day, at the end oftrading.

Industry experts say institutional investors, who like thegreater trading flexibility, make up about half the market. Therest are purchased through advisers and brokers, and about 10percent are bought by individual investors.

"ETFs are an instrument that has sort of started to come of agein the last couple of years," said John Rea, chief economist withthe ICI. "We really need a few more years to see how it evolves… in the retail sector."

The number of ETFs ballooned from about 80 in 2000 to 133 lastmonth after The Vanguard Group raised its stake with its 14 newVIPER funds. The biggest player remains Barclays, which offers 85different ETFs, many launched through its iShares family over thelast 3½ years.