Variety can complicate your life rather than make it simpler.

Starting Friday,

Barclays Global Investors

will begin unveiling a collection of 35 exchange-traded index funds.

These new funds -- which will trade just like stocks on the

American Stock Exchange

-- slice up the market in ways many retail investors have not seen before.

The number of large-, mid- and small-cap index funds is enough to make you dizzy. Barclays will have funds tracking three indices each from

Frank Russell


Standard & Poor's

. That's six. Then each one of those indices will be broken into separate value and growth options, bringing the total to 18.

Throw in 14 sector funds, one Canada fund, a European fund and the

Dow Jones U.S. Total Market

index, and the choices become a bit overwhelming.

As a whole, exchange-traded funds offer some obvious benefits. "You get quick, inexpensive exposure to different markets and sectors," says Robert Levitt of

Levitt Capital Management

in Boca Raton, Fla.

Plus, these funds are less likely to make taxable capital-gains distributions than traditional index funds.

Fine. But with so many choices, how are you supposed to use these funds in your portfolio?

I asked some pros for their suggestions.

Buying the Market In One Fund

The whole idea behind buying an index fund is to own a large piece of the market and hold it -- through good times and bad -- over a long period. With a single fund, you can get a broadly diversified portfolio that's inexpensive to own. You buy it and then you leave it alone.


founder Jack Bogle has often said that the only investment you need is a total stock market fund -- one that encompasses the entire U.S. market.

Of course, you can find a few of those among the coming Barclays offerings, known as




Russell 3000

(IWV:Amex) is considered a total-market index. It tracks the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents about 98% of the U.S. equity market.

The Dow Jones U.S. Total Market (IYY:Amex) index, which will come out later, tracks more than 2,000 stocks representing about 95% of the domestic stock market.

So you've got two basic choices from Barclays for a very broad market fund.

However, if you already own the

(VTSMX) - Get Report

Vanguard Total Stock Market fund, which tracks the

Wilshire 5000

index, you don't really need to switch. The two Barclays funds have the same expense ratio (0.2%) as the Vanguard fund. And at least two of the funds barely differ in terms of returns. For the trailing two-year period, the Russell 3000 and the Wilshire 5000 have both climbed about 29%, according to


. (Data weren't available on the Dow Jones index.)

Finding Balance

For some professionals, however, a total market fund still offers too much exposure to large-cap stocks.

"I would suggest that 90% of the Wilshire 5000 index is what people consider large cap," says Jeff Troutner, president of

TAM Asset Management

in San Anselmo, Calif., and senior editor of

On top of that, Troutner thinks about 85% to 90% of the index is dominated by growth stocks.

Rather than buy a total market fund, an investor might use Barclays' new index funds "to get more of an even balance between large growth and large value and small growth and small value," Troutner says. For example, you could use the

Russell 1000 Growth

(IWF:Amex) and


(IWD:Amex) index funds for your large-cap allocation and the

Russell 2000 Growth

(IWO:Amex) and


(IWN:Amex) funds for small cap. (You'll also find S&P indices that can serve the exact same purpose.)

However, the risk of this approach is that, at any given time, you can be pretty far off the market's current returns. "You have to understand why you are doing this. You want more balance," Troutner adds.

If most of your portfolio is in a total-market fund or is otherwise heavily weighted to large-cap growth stocks, the Russell 1000 Value fund will add exposure to large-cap value stocks.

Or "if you have a concentration in

S&P 500

names, you can diversify into the

Russell 2000

(IWM:Amex) or the

S&P SmallCap 600

(IJR:Amex) to eliminate any size bias," says Diane Garnick, derivatives strategist at

Merrill Lynch

. The Russell 2000 index has climbed 6.9% over the past two years, compared to a 4.5% rise for the S&P small-stock index, according to Baseline.

"If small cap begins to outperform, you have exposure. You aren't limited to the large-cap universe."

It's worth noting you can currently find some style-specific index funds at Vanguard as well. The Barclays funds may have a small edge over Vanguard in terms of tax-efficiency and price. How well these funds will track their respective indices remains to be seen. Vanguard indexes have been known to occasionally out perform the indexes they track.

Sector Spice

The Barclays funds also break the market down into 14 sectors, from chemicals and cyclicals to technology and utilities. And you can trade these funds like stocks, playing the rise and fall of narrow market segments.

That causes some professionals to start sounding the warnings.

"If you're going to make a bet on a sector like that, I think you're wrong to do it either with an index or an actively managed fund," says Troutner. "Now you're starting to get down into market timing and sector timing. Barclays is giving you the tools to place your bets."

Barclays spokesman Tom Taggart responds, "We look at it as a modular approach where everyone can establish a true asset allocation strategy for their portfolio."

Indeed, jumping from one narrow part of the market to another ignores a key reason you buy an index fund in the first place: You don't know which stocks will outperform at any particular moment so you buy the whole market.

"A broad-based index has all different stocks in proportion to their market value, which typically dampens the ups and downs," says Andrew Lo, a professor at the

MIT Sloan School of Management

and director of the

Laboratory for Financial Engineering

. With a specific sector fund, "you're losing diversification and you get more volatility."

However, some professionals think these new Barclays funds are a great way to invest if you're bullish on a particular sector.

Right now, for example, energy stocks are doing well with interest rates rising and high oil prices. The

American Stock Exchange Oil

index is up 22.4% since the end of February.

"If you like energy and you don't have the time to do the fundamental analysis to decide which company is going to be the best performing,


Dow Jones U.S. Energy

(IYE:Amex) index gives you exposure to energy," says Merrill's Garnick.

If economic growth starts to slow, you may want to be in consumer staples -- companies that produce goods that consumers can't put off buying. Basically, you want to go long food and toilet paper.

You can also use these sector indices to beef up your portfolio in areas that are underweighted relative to the overall market. You might look at your overall portfolio and realize you only have 5% in health care and you want to bring that up to a market weighting of 10%, as represented in the Wilshire 5000 index. A health care index fund would let you do that quickly.

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Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.