Stormy markets to slow growth of ETFs in '08

It's raining ETFs. Will investors need an umbrella?

The number of exchange-traded funds more than doubled, to 629, last year, while total assets increased 45 percent, to $608 billion.

International stock index ETFs attracted the most money, followed by growth-stock, fixed-income and commodities ETFs.

Expect this growth to slow this year, clouded by the stormy markets. The silver lining, however, is an opportunity for a bargain-hunter ETF strategy.

Traded on exchanges during market hours, ETFs replicate market indexes for low-cost diversification. There's no minimum investment or penalties for redeeming. Annual fees are generally lower than those of mutual funds, though you do pay trading fees.

While broad-index ETFs are used to build a foundation for an individual portfolio, the greatest growth opportunities are in riskier specialized offerings. For example, iPath MSCI India Index (INP) was up 86 percent last year; Market Vectors Steel ETF (SLX) 84 percent; and iShares MSCI Brazil Index (EWZ) 75 percent, according to Morningstar Inc.

"In 2007, ETFs went from being vehicles that people were just discovering to being fully discovered," said Tom Anderson, head of strategy and research for Boston-based State Street Global Advisors, one of the largest ETF managers. "They're being used as a core portion of portfolios, with some investors building all-ETF portfolios because they can get pretty much every type of equity exposure they're looking for."

ETFs invest in bonds: State Street rolled out the first municipal bond ETF last year, the SPDR Lehman Municipal Bond ETF (TFI) that tracks the long-term tax-exempt bond market. In junk bonds, it introduced SPDR Lehman High Yield Bond ETF (JNK).

ETFs can be trendy: Claymore/LGA Green (GRN) tracks the Light Green Eco Index of 225 companies with the best combination of environmental performance trends in their industries. It is down 8 percent this year.

ETFs can be finite: FocusShares ISE-Revere Wal-Mart Supplier (WSI) invests in stocks of companies deriving a substantial portion of their revenues from Wal-Mart Stores. It is down 9 percent this year.

As with all investments, market climate makes a difference.