By: Michael E. Martinez

Exchange Traded Funds (ETF's) are like a mutual fund and stock rolled into one. ETF's are baskets of stocks that either follows a sector, industry, country or a certain theme. Mutual funds perform the same objective, but ETFs trade as stocks, so they can be bought or sold like them. These investment vehicles have become increasingly popular as of late. But like mutual funds, you do have expense ratios. Expense ratios are the percentage of the assets invested.

A popular way for new investors to get involved in the market are to invest in ETFs to minimize stock picking and get the benefits of an entire sector or country as a whole. Some examples of index ETFs are the QQQQs, Diamonds and Spyders. Since, you can't buy shares in indices such as the Dow Jones Industrial Average or the NASDAQ; these are vehicles that allow you to receive benefits from index movement. ETFs can also be used speculatively in a fairly new index such as nanotech. Not all nanotech companies will survive in say five years, in any index or sector there will be a few bad companies.

However, ETFs allow you exposure to all types of companies in a particular sector. An example of a country ETF is iShares MSCI Japan (EWJ); which has major exposure to companies that trade in Japan; rather than picking individual names in Japan, sometimes it's just better to be invested in the whole country. Capital gains are generated when ETFs adjust for chances in underlying indexes are relatively infrequent. Most dividend reinvestments are normally automatic with index funds, but with ETFs, this is harder in addition to relatively high share prices.

ETFs also have lower turnover ratios which allows them to be more tax efficient. The turnover ratio shows how quickly or slowly the fund buys and sells its investments. Most ETFs are listed on the American Stock Exchange (AMEX) and the first ETF was offered on the Toronto Stock Exchange in 1989. The popularity of ETFs are still likely to increase as more options are available with time.