4 Tips for Investing in ETFs

NEW YORK (TheStreet) -- Exchange-traded funds, or ETFs, are growing at an explosive pace, with more than 1,000 products now slicing and dicing every corner of the market. While they offer a number of advantages over mutual funds, investors need to understand what they are trading before they follow the herd.

ETFs are index funds that can be traded on an exchange like stocks but offer the benefits of diversification and low costs. It's little wonder then that their place in the average retail investor's portfolio is growing rapidly. Charles Schwab reports that the ETF adoption rate by its retail clients is accelerating, with retail client flows accounting for 50% of the total flows over the past 12 months. Many of them tend to be affluent, retired investors.

On Tuesday, ETF providers at a panel discussion hosted by Charles Schwab(SCHW) met to discuss pros and cons of trading in these funds -- and acknowledged that the novelty of ETFs still confuse most investors. There are plenty of investing novices who still refer to ETFs as "EFTs," quipped Scott Burns of Morningstar, who moderated the discussion.

Others just want to buy ETFs because of all the hype, knowing very little about the nuances of ETF investing. Still others are now wary of investing in ETFs, shaken by the May 6 flash crash, when ETFs made up a disproportionate number of the worst affected securities as pricing mechanisms failed.

Here, then, are four broad ETF investing takeaways from the conference --