A report in the Wall St. Journal cites several financial strategists that predict the already popular ETF industry will continue to expand as much as 30% a year for the next several years. The report states that exchange-traded funds have grown faster than any other segment of the asset- management industry and are changing the investment business around the world.

Because ETFs investment funds are listed and traded on stock exchanges, and contain stocks, commodities or bonds that track an index, they have become especially popular with online investors The estimated value of the ETF market is currently worth $1.71 trillion and seven of the ten most-active stocks in the U.S. are now ETFs. Although most ETF providers track the FTSE 100 and the S&P 500, some are based on more specific sectors like those that track gold and other metals. ETFs that invest assets in the same proportion they appear in the tracked index are known as Physical ETFS, while Synthetic ETFs purchase only the derivatives tracking the underlying product, and do not actually buy the product. Either way, ETFs purchase derivatives through investment banks and help generate equity-trading flows.

Some analysts have warned that because ETFs are so easy to buy and sell they could lead to excessive speculation and that there could be problems with the quality of collateral posted to guarantee swaps. The Financial Stability Board warned that the use of synthetic ETFs could cause problems in unstable market conditions, particularly where the collateral used to guarantee the value of derivatives could be inadequate. However, ETFs remain popular with the banks due to their pricing clarity and the high level of turnover. ETF traders believe that ETF pricing is efficient and capable of supporting other trades and short sales by hedge funds. A report published by Goldman Sachs said short ETF positions currently account for over 80% of hedge fund gross ETF exposure. The fees are smaller too, as the ten biggest ETFs in the U.S. charge an average of 0.26% compared to the 1.5% charged by the average actively managed mutual fund.

So far, ETFs have a very good report card over the last 20 years in the U.S. and the predictions of 30% a year growth don’t seem exaggerated. As long as the financial markets continue in turmoil, it is a good bet that people will continue to sell their stocks and mutual funds in order to go into ETFs.

Although Exchange Traded Funds (ETFs) are one of the fastest-growing and most popular investments on Wall Street today, the North American Securities Administrators Association (NASAA) recently cautioned investors that the popular funds can possess hidden downsides that could hit unaware investors in the pocketbook. The NASAA warning cautioned investors to make sure they truly understand ETFs and to first consider carefully whether or not the investments are good for them before they invest any cash.

The advisory comes at a time when ETFs have grown in popularity with retail investors during the last decade because they can diversify a portfolio like a mutual fund and they can also be bought and sold during the a single day period. The North American Securities Administrators Association is an organization composed of top securities regulators and those regulators are primarily concerned with two relatively new types of ETFs that are designed to invest using borrowed money in the form of “leveraged ETFs”, or to move in the opposite direction of a market or index as “inverse ETFs”. The regulators worry that investors don’t understand the risks of these new more exotic types of ETFs and may not even understand how the more complex investment products actually work.

Most exchange-traded funds are bundles of investments like stocks, bonds, commodities, currencies, options, swaps, futures contracts and other derivative instruments that are created to mimic the performance of an underlying index or sector. He NASAA regulators also pointed out that not all ETFs are the same and while some may be appropriate for long-term holders, others, including the leveraged and inverse ETFs, may require intense scrutiny and daily monitoring. Investors are cautioned to make sure they understand the risks, costs and tax consequences before investing in ETFs. It is up to the individual investor to read the prospectuses on complex investments and if they don’t understand how the leverage works or what investments an ETF owns, the outcome may be very disappointing.

The North American Securities Administrators Association ETF advisory detailed several risks associated with ETFs, including:

Taxable gains – Many inverse ETFs are marketed as a way to bet against the broad market and many leveraged ETFs are sold as ways for investors to make extra-large bets. However, since these types of ETFs are adjusted each day, the investors can rack up surprise taxable gains in the process.

Risk of closure – Although closures have not been a big concern for investors as only one ETF has closed this year, the number of ETFs that are shut down or liquidated has risen by 500% in each of the last three years over 2007 levels, a figure that translates to one closed ETF per week.

Fees – Because leveraged and inverse ETFs are constantly traded they can incur significant brokerage fees and commissions in the process. Although ETFs are generally considered less costly than mutual funds, many investors tend to overlook some of the other costs involved including the difference between the price they paid for an ETF and the eventual selling price.

The ETF marketplace has quickly grown into a mainstream investing tool as funds from around the world have become available. As the market continues to evolve, investors are now seeking to place larger portions of their portfolios in international equities to gain more broad-based exposure and target specific sectors. As a result, a few ETF issuers have begun launching funds that offer more targeted exposure to economies outside of the United States. One area that has experienced very rapid ETF development is China, where the most popular ETF to date has been the iShares FTSE/Xinhua China 25 Index Fund that carries more than $10 billion in assets. However, the index behind that fund has been largely run by mega-cap companies aimed primarily at the Chinese financial sector, and largely neglects industrials and consumer products as investments.

Now, Claymore Financial and New York-based Global X have introduced several sector-specific China ETFs that will allow investors access to more sectors of the Chinese economy. In the tech sector, Global X China Technology ETF, and Claymore China Technology ETF offer U.S. investors the ability to target Internet companies, telecommunications firms, as well as software and hardware manufacturers. China has the world’s largest tech marketplace with over 600 million cell phone users and 300 million internet users in a growing middle-class economy. Because disposable incomes in China will only continue to rise, there is good potential for growth in the tech marketplace.

For investors looking for more ETF exposure in China’s growing food and beverage markets, automobile manufacturers, department stores, and even sports apparel companies, the Global X China Consumer ETF delivers the goods in the consumer sector. Because consumer spending currently accounts for a third of China’s GDP, which is about half of the consumer contribution in the United States, the Chinese government has stated a goal of expanding domestic consumer spending going forward.

Those seeking more factory-based ETFs will find the Global X China Industrials ETF fund offers exposure to Chinese industrial manufacturers, construction materials firms, and various shipping and logistics companies. China’s industrial output is rising by over 15% per year, and more than one economic forecaster has said that China will pass the United States as the world’s largest manufacturer before 2014. The Chinese factory sector will likely see continued growth for the rest of this decade, and that makes it a very good place to invest some cash.

For investors interested in accessing China’s growing energy sector, the Global X China Energy ETF looks very promising. As the Chinese economy continues to grow, the nation will need to build and develop the energy infrastructure. Massive amounts of energy will be needed to support the huge and growing population and new sources of power are almost a sure thing, making investment in China’s energy future a solid prospect. Investors have also been favorable about China’s financial sector as the country continues to develop its own banking industry. The Global X China Financials ETF allows U.S.-based investors to tag along as the nation transitions to a self-sufficient financial power in its own right.

A large investment company in the U.S. recently announced plans to launch a program enabling plan sponsors and independent RIAs to offer exchange-traded funds to 401k participants. This is new in the ETF sector because 401k record keeping and accounting systems have traditionally been based on mutual funds traded in fractional shares and work off next-day settlements. Because ETFs are traded throughout the day and only in whole shares, it could be a bit of a challenge to integrate the two.

As a result, TD Ameritrade Trust has responded by developing a trading process that has the ability to trade in the fractional shares of ETFs and to facilitate next-day settlement as well. The use of ETFs among TD Ameritrade clients has jumped more than 30% annually for the past two years according to company statistics, but the swing toward ETFs has been slow due to the technical challenges of working with ETFs. TD Ameritrade says the new platform eliminates per-share fees and transaction fees for 401(k) plans, and eliminates the need for reconciling the different platforms as well.

TD Ameritrade Trust says the new platform will allow ETFs to join mutual funds; collective investment funds and employer stock plan portfolios because the platform is an open architecture system that will allow advisors and plan sponsors to choose ETFs from multiple providers.

Critics of the plan have said any platform that adapts 401k plans to accommodate ETFs will need to figure out a way to keep track of investing the small contribution amounts that are completely different than the full price of a share of the ETF. To be effective the platform will have to distribute small amounts into retirement and then reinvest the dividends in even smaller amounts. Some critics have also said that just because ETFs can reduce costs, it is not enough justification to use them in 410k’s, and pointed out that there is a big difference between passive portfolio management, and proactive decision making.

The current demand for exchange-traded funds is high and ETFs are one of the fastest growing sectors of the financial marketplace with total ETF assets recently reaching $1 trillion worldwide. However, just because they are popular doesn’t mean they are all great investments, as some ETFs are obviously better than others.

It is assumed that exchange-traded funds are less expensive to own than most actively managed mutual funds. ETFs are more tax-efficient and they offer far greater day trading flexibility than regular mutual funds. The large, broad-based ETFs offer coverage of entire segments of the market in one fund and with some agencies cutting trading commissions drastically, ETFs are the most affordable way to own a slice of the market.

However, it is not all perfect all the time and there can be some potential downsides to investing in ETFs. Investors who use ETFs as short-term trading vehicles and engage in frequent trading will quickly find out that the fees can add up and destroy any cost advantage the funds had to begin with. Other ETFs that are thinly traded may lead to liquidity problems causing wider spreads between the price buyers are willing to pay and the price sellers are asking. Now that hundreds of different ETFs are available, investors need to shop carefully when looking at ETFs to call their own.

There are some less-than-desirable ETFs out there and investors looking for a way to determine if a fund was a good choice or a bad investment need only look at the price. The main difference between the cheap funds and the more expensive ones is that the inexpensive ETFs are broad-market funds that track huge sections of the market with diversified indexing. In contrast, the more expensive single-country, leveraged funds offer two or three times the daily return of their index and investors must endure serious risk to play. These funds do offer exposure to big-brand emerging market stocks but may be more suited to gambling than investing.

The funds at the low end will be broad-based funds that track wide portions of the markets while the more costly ETFs will invest in only one market sector or country, leveraged funds. Although inexpensive ETFs are not always appropriate long-term investments, many investors do well with broad market, well-diversified funds. ETFs with complex strategies and more bells and whistles will try to charge for things you can usually do without. Keep it simple and inexpensive when starting out with a broad-based fund. Obviously price is not the only factor when determining whether an ETF is a solid investment or not, but it can be a very good place to start.

Now that the New Year is just around the corner we can look back at some of the bright spots in the ETF industry during 2010. These are the top ETF funds that made progressive recovery despite multiple obstacles ranging from rising unemployment to inflation concerns to ongoing international debt crises.

WisdomTree Dreyfus Emerging Currency Fund (CEW)

Emerging markets with developing economies have been paying staggeringly-high rates for investors and CEW invests in a basket of funds in emerging markets ranging from South America to Eastern Europe and Asia.

IndexIQ CPI Inflation Hedged ETF (CPI)

Although CPI tries to deliver returns above the rate of inflation but is not limited to any one holding and has the ability to invest in multiple asset classes, including equities, bonds, commodities, and currencies making it a potential hedge against future inflation.

Dow Jones Emerging Markets Financials Titans Index Fund (EFN)

Emerging market ETFs are still a good bet heading into 2011, and EFN has shown most emerging markets’ financial institutions are mostly free of toxic debt and offer more flexibility than domestic banks.

SPDR Russell/Nomura Small Cap Japan ETF (JSC)

The Japanese government has been committed to economic growth and is rolling out more stimulus plans to revive its sputtering economy and if Japan completely recovers from its economic malaise, JSC could lead the charge to higher yields.

SPDR Barclays Capital High Yield Bond ETF (JNK)

JNK beats the yields offered by Treasuries with an average coupon of 9.1% and a yield to maturity of 9.6%. While far from risk-free, JNK does deliver a lot for a fixed income investment.

Utilities Select Sector SPDR Fund (XLU)

The utilities sector SPDR lagged behind the technology sector in 2010 and the slow climb may make XLU a good option for investors looking to find a bargain in the market for low risk, defensive equities.

iPath S&P 500 VIX Short-Term Futures ETN (VXX)

As it seems likely that the market will hit some bumps in the road in the coming year that could drive the equity markets into a spin, investors might want to consider adding a 5% allocation of VXX short-term futures as portfolio insurance. VXX invests in futures contracts on the CBOE Volatility Index and has shown strong negative correlation with stocks.

Global X FTSE Nordic 30 ETF (GXF)

The Nordic ETF is on relatively solid ground in Finland. Along with Sweden, Denmark, and Norway, the four markets represented by GXF have added more than 10% since launch and the fund appears to be healthier than most European ETFs.

Market Vectors Gaming ETF (BJK)

The gaming industry posted an impressive performance in 2010 as unemployment translated into a decline in revenue for governments who had to get creative with their budgets and made gambling revenues a more viable option. More U.S. states are currently considering legalizing different types of gambling and those moves will boost demand for gaming machines and technology.

PowerShares Global Listed Private Equity Portfolio (PSP)

The PSP ETF invests in publicly-traded private equity companies and other financial institutions with business in investing and lending capital to privately-held companies and only allocates a third of its holdings to U.S. companies.

Despite the recent upheaval in the residential and commercial real estate markets, exchange-traded funds (ETFs) comprising real estate investment trusts (REITs) have quietly been leading the S&P 500 by a healthy margin, and even outperforming it over the last year. The U.S. ETF Real Estate category was up 22% year-to-date through Sept. 21, compared to just 3.71% for the entire S&P 500 stock index over the same period. It is a new development, but there is no denying REIT ETFs have made some remarkable gains.

A REIT ETF is a security that sells like a stock on the major exchanges and invests in real estate directly through properties or mortgages. REIT ETFs get special tax considerations and offer investors a chance for high yields. A typical REIT ETF will invest in a mix of shopping malls, office buildings, apartments, warehouses and hotels. Some types of REIT ETFs invest in specific areas of real estate or in a specific region, state or country. The attraction is that investing in REIT ETFs is a liquid, dividend-paying way to participate in the real estate market with limited risks.

Tax efficiency, liquidity and compound interest make REIT ETFs very attractive as a short option for investors. For example, if an investor lacks $100,000 to purchase a property, he can probably find a REIT ETF that starts at just $50. Another attraction is that REIT ETFs require spending 95% of revenue as dividends, making them strong investment vehicles. While it is true that most REIT ETFs went through a severe devaluation and lost more than 60% of their value during the recent real estate financial crisis, the U.S. economy has now improved and real estate values have stopped falling and are beginning to show signs of balance again. As the underlying commercial real estate securities and properties recovered their values, so did the REIT ETFs. The market is still tough but the markets are beginning to bid the prices on REITs back to reasonable levels again.

As investors began to realize the market was stabilizing they began looking for higher income with REITs. Current REIT ETFs are paying 3.5% yields compared to just 1.7% from S&P 500 companies. As the credit markets began to open up again the REIT ETFs were able to refinance and raise cash on more favorable terms.

Despite their good recent performance, REIT ETFs will still be tied to the stability of the underlying properties owned by the trusts. As long as the rent is paid and leases are renewed, the REIT ETFs will remain stable. The situation will remain in balance unless the commercial real estate market weakens to the point that shareholders no longer find value and sell their shares off. The basic principle is that as long as the economy moves forward, real estate will be stable too. Savvy investors would be well advised to prepare for the possibility of seeing the real estate market swing both lower and higher as the economy continues to recover.

Since the first exchange-traded fund (ETF) was launched in 1993 ETFs have continued to grow in popularity and gather assets at a rapid pace. Most people find the easiest way to understand the concept of ETFs is to think of them as mutual funds that trade just like stocks do.

However, mutual funds are priced only one time at the close of business each day and everyone who purchased a particular fund that day will get the same price regardless of the time of day their purchase was made. ETFs can be traded at different values during different times of the day and provide an opportunity for speculative investors to bet on the direction of short term market movements through the trading of a single security.

This creates a situation where if the S&P 500 is experiencing a sharp rise in prices during the day, investors might be able to take advantage of that rise. The tactic consists of purchasing an ETF that mirrors the index, like a SPDR, holding it for just a few hours as the market price continues to rise and then selling it at a profit before the close of business at the end of the day. Investors in a mutual fund do not have the ability to take advantage of the daily fluctuations of its basket of securities. The ETF allows investors to trade the entire market as though it were one single stock and they can also be used for speculative trading strategies like short selling and trading on the margin.

With low costs, flexible portfolios and tax efficiency it is easy to see why ETFs are very popular financial instruments today. Most of the drive for expansion in exchange-traded funds comes from professional investors and active traders. Most long-term investors will discover that broad-market ETFs are a good fit for their portfolios when they have an opportunity for occasional large-size purchases of securities. Trading in ETFs does require active participation in fund management though, and investors who are more interested in small investments and passive fund management should probably stick with the conventional index mutual fund.

Exchange-traded funds (ETFs) that are similar to mutual funds but trade like stocks have become a popular investment vehicle for both small and large investors alike. However, there can be some disadvantages to ETFs that investors need to be aware of before start trading.

One of the biggest attractions of ETFs is that they trade just like stocks and when you buy or sell stocks you pay commissions and the same thing applies to ETFs. Depending on how often you buy and sell, ETF trading fees can quickly add up and reduce your investment’s overall performance. No-load mutual funds have an advantage over ETFs in that they are sold without a commission or sales charge making it imperative to be aware of the costs when comparing an investment in ETFs to a similar investment in mutual funds.

When deciding between similar ETFs and mutual funds investors should be aware of the different fee structures of each instrument, including the commission fees. The commissions can add up quickly if you trade a lot of ETFs. Because ETFs contain more than one underlying position doesn’t mean that they can’t be affected by volatility in the marketplace and the fluctuations will depend on the scope of the fund.

ETFs that track a broad market index will be much less volatile than an ETF that tracks one specific industry or sector. When it comes to international ETFs, the credit worthiness of the currency in the country that the ETF is following will play a large part in determining the success of any investments in a particular country or region. The best advice is to understand the market the ETF is tracking and to know the underlying risks associated with it.

The liquidity factor of an ETF means that there is enough trading interest in an ETF that you can sell it relatively quickly without changing the price. If a particular ETF is trading lightly there may be problems when it comes time to get out of the investment depending on the size of your position in relation to the average trading volume. In order to make sure an ETF is sufficiently liquid you should study the spreads and market movements over a full month before making a purchase.

Since ETFs are traded like stocks and every time you want to purchase $1,000 worth of an ETF you will have to pay your broker a commission, it can become more expensive to build up a position in an ETF with monthly investments than it would with a lump sum approach. The best approach is to try to invest a lump sum all at once to cut down on the brokerage fees.

Knowing the risks that come with ETFs allows an investor to make better investment decisions. Even though ETFs have seen a well deserved growth in popularity, like all good things, ETFs can also have their drawbacks and making good investment decisions requires knowing all of the facts up front.

The exchange-traded fund (ETF) is a recent financial invention that has made a big impact on the financial market and created brand new opportunities for market investors at the same time. Some historians say the introduction of SPDRs in 1993 was the beginning of a relatively slow start for ETF industry. The markets in Asia didn’t offer ETFs until 1999 and in Europe ETFs came into use in 2001. By the end of 2002 there were still only about 250 ETFs available worldwide and nearly half of those were on the European exchanges. The last decade saw an explosion in ETFs and by the beginning of 2010 there were over 1,000 ETF products trading on the U.S. exchanges alone.

ETFs are often compared to mutual funds because they trade like stocks with smaller management expense ratios. The comparison is true when you consider that investors buy a mutual fund to get exposure to a group or basket of many stocks or sectors because purchasing two dozen stocks individually would cost too much and requires too much research as well.

ETFs offer investors the same advantages and have better liquidity because ETFs shares trade like shares of traditional stocks making them useful tools for long- and short-term investors alike. ETFs are legitimate competitors to the mutual fund companies even though the size of the mutual fund industry dwarfs the ETF industry. The U.S. mutual fund industry had over $18.7 trillion in assets under management last year while ETF combined business just edged above $1 trillion for the same time period. The ETFs are the better bet if you want to explore various investment potentials and the fact that more and more are mutual fund firms are getting into the ETF business themselves underscores the fact.

Many investors have a rule of not including asset classes like commodities, emerging markets and foreign currency in their portfolios because the traditional way of entering those markets has always been with futures that require a significant outlay of cash and they can also carry increased risks. ETFs are a way for conservative investors to access securities like gold, oil and currencies beyond the U.S. dollar. Foreign gold or European ETFs trade like stocks do and they can be bought and sold at any time without any loading fees. Mutual funds are rarely offered in the same areas and usually come with higher fees.

In any comparison with mutual funds, ETFs are more cost-efficient because they have lower expenses than most passively managed index funds. The result is obviously fewer fees and expenses to eat away at your profits with ETFs. ETFs also have some tax benefits that mutual funds don’t. When you make a profit on an ETF you will pay capital gains taxes. With mutual funds the investor will pay capital gains as well as other tax liabilities for the gains a mutual fund accumulates over time.

ETFs could well be the most important addition to the retail investors’ arsenal in the past several decades and it is highly likely that the future will see more investment firms entering the ETF field with an assortment of new product offerings in the years ahead.