Brave New World for ETFs?

There's big news in the exchange-traded fund (ETF) industry. Whether it's good news or bad news, though, remains to be seen.

The boom in ETFs -- which are similar to index mutual funds but are bought and sold on an exchange like stocks -- seems to have peaked, according to a May 2002 study by Lipper, a mutual fund research firm. As the industry struggles to reinvent itself, though, the Securities and Exchange Commission is taking a closer look.

Since their introduction in 1993, ETFs have only held equities that track an index. Unlike traditional, open-end mutual funds, though, ETFs trade like stocks (or closed-end funds): They can be bought and sold throughout the trading day, sold short and bought on margin. Most charge lower annual expenses than even traditionally low-cost index funds (0.19% vs. 0.65%, according to Lipper), although there's a commission charge for each sale or purchase. (So if you invest regularly, the periodic trading fees can add up to far more than an index fund's expense ratio.) ETFs and index funds share the tax advantage of low-turnover investments. ...