ETFs can lay portfolio foundation

Amid the plague of mutual fund scandals, the so-called exchange-traded funds, or ETFs, are a welcome antidote.

Unlike regular funds, which are generally priced once daily, at 4 p.m. Eastern Time, ETFs trade like stocks. You buy and sell them through brokers throughout the day. Their prices change constantly, leaving scant opportunity for rapid traders to exploit pricing anomalies.

ETFs are ideal for laying the foundation of a portfolio or for trying to improve returns with side bets. Some mimic specific indexes, while others are designed to duplicate the performance of a predesignated package of stocks from a single industry or sector. And there are others that track markets in various regions or even single countries.

ETFs share an important attribute with regular index funds: Because the portfolios are fixed, ETFs don't have to pay chunks of money to managers and analysts. As a result, ETF fees tend to be low — in some cases infinitesimal.

For example, iShares S&P 500 ETF (symbol IVV), which tracks Standard & Poor's 500-stock index, charges only 0.09 percent annually for expenses. That's half the expense ratio of Vanguard 500 Index, the standard-bearer for traditional index funds. Savings on fees are the most important reason that index funds beat most actively managed funds over long periods of time.

On the other hand, ETFs come with the same baggage as traditional index funds. They are forced to own bad companies as well as good ones, absurdly overpriced stocks as well as cheap stocks. And if you own an ETF in a sector or style of investing that is out of favor, you're out of luck.

You can find ETFs for every sector, from biotech to energy to transportation. For investing overseas, some ETFs specialize in regions such as Europe and Latin America, while others home in on single countries, including Singapore and Spain. As with any sector or single-country fund, specialized ETFs have the potential for big gains but also carry big risks.

Because you buy ETFs through a broker, you'll have to pay a commission on each purchase and sale. If you're investing a little bit every month, it will probably cost less to use regular index funds. But if you're investing, say, $10,000 or more, plan to hold on for a while and use a low-cost broker. ETFs are just as cheap and sometimes cheaper.

A fine resource about ETFs is Amex.com, which offers fact sheets on every one. And the site www.Morningstar.com provides data and analysis on ETFs.