Finding ETF Indices

Despite all the hype over exchange-traded funds, it's important for investors to remember that there is no such thing as a "good" or "bad" ETF. It's really the index behind it that matters.

ETFs are index funds that trade continuously during market hours like stocks, thereby allowing investors to lock in a price at any moment. There are now nearly 250 ETFs with a total market value of $350 billion.

Many analysts believe that the ETF explosion is still in its early stages, as the number of new offerings keeps growing. So far this year, there have been roughly two ETFs launched per week. These newest funds not only track assorted stock indices, but also commodities like silver through the iShares Silver Trust(SLV Quote) and oil via the U.S. Oil Fund (USO Quote).

Providers looking to enter the ETF arena now face the hurdle of finding worthwhile indices to track given that the highly recognizable names have been taken. And from an investor's perspective in this crowded landscape, the question becomes, how does one differentiate between ETFs tracking similar indices?

To learn more about what makes a suitable index for an ETF, TheStreet.com chatted with David Blitzer, managing director and chairman of the index committee at Standard & Poor's.

TheStreet.com: What makes a good index for an ETF to track?

David Blitzer: Generally speaking, there are two kinds of indices -- benchmark indices and tradeable indices. Benchmark indices focus on complete coverage of an asset class, simple rules and predictable adjustments. Examples of benchmark indices are the S&P/Citigroup Global Equity Indices, the MSCI EAFE and the Russell indexes.

ETFs should be based on tradeable indices. A tradeable index is one that includes liquidity in the stock-selection criteria, times index changes to reflect market events and conditions and, most of all, is actively monitored by the index provider.