A Suze Orman exclusive

ETF ABCs
ETFs, which have exploded onto the investing scene over the past few years, are basically index mutual funds with one hugely important difference. They trade during the day. By that I mean their price changes constantly throughout the day, based on what buyers and sellers are willing to pay at any given moment while the stock market is open. So if you place an order to sell shares of an ETF at 10 a.m., your trade is going to go through in a few minutes, at most. There's no need to bite your nails for six hours wondering what the closing price will be.

Just like an index mutual fund, when you buy an ETF you are buying shares in a portfolio of dozens - if not hundreds - of stocks (or bonds). This basket of stocks is tied to an underlying index, meaning it holds the same stocks as an index. Two of the most popular ETFs are the SPDR (symbol: SPY), which tracks the performance of the S&P 500 stock index, and the NASDAQ 100 Trust Series (symbol: QQQ), which tracks the performance of the NASDAQ 100 stock index. There are dozens of other ETFs, from ones that track foreign stock market indexes (iShares MSCI EAFE Index, symbol: EFA) to specialty ETFs that follow a real estate benchmark (iShares Dow Jones US Real Estate Index, symbol: IYR), as well as bond ETFs.

I recommend sticking with the most popular ETFs; you want to make sure there's plenty of liquidity, so that the moment you want to buy and sell you will be able to make a trade. If you invest in a relatively obscure ETF you may have to pay more (or sell for less) to be able to make the trade. ETFs with low liquidity also tend to have higher expenses. You can learn more about ETFs at www.amex.com.

The upshot is that you can easily create a diversified investment portfolio using ETFs. Not only do you have more minute-by-minute control of your investment, but the cost can be a lot lower, too. For example, dividing your money between the SPDR and the iShares Russell 2000 Index ETF (symbol: IWM) would give you exposure to both large- and small-cap stocks. The SPDR will set you back 0.12 percent a year and the Russell ETF runs 0.20 percent a year. Or you could invest in the Vanguard Total Stock Market Index (VTI) ETF (0.15 annual expenses) that gives you exposure to large- and small-cap stocks in a single package. And though I prefer direct ownership of bonds, rather than through a fund (I'll explain that in another column), if you want to go the ETF route, there are plenty of solid options such as the iShares Lehman 7-10 Year Treasury ETF (symbol: IEF).