ETFs: The First Step Is Admitting You Don't Have a Clue

How much do you know about exchange-traded funds?

If you're a regular reader of this column, you probably know more than most people. But because fewer than half the investors who own mutual funds understand the difference between these products and ETFs, that's not necessarily saying much.

According to a new study by Rydex Investments, 38% of all mutual fund investors don't even know what an ETF is.

It's a startling statistic, considering that these investment vehicles have been around for 14 years.

ETFs are baskets of securities that combine the benefits of an index mutual fund with stocklike trading features. Like mutual funds, ETFs allow you to invest in a pool of securities in a single transaction. And similar to stocks, they are listed on an exchange and can be traded throughout the day, bought on margin or sold short.

By comparison, open-end mutual funds are issued and redeemed by their sponsors just once a day, at the market's closing price.

These products are already a big hit with institutional investors, who account for the bulk of trading. Now the ETF industry is making a bigger push to get the attention of individual investors. Ads for ETFs have popped up during football games and in the New York City subway system. While it's not unusual to see ETF ads in personal finance magazines, they are also appearing in more broad-based publications, such as The New Yorker.