Let's hear two and a half cheers for exchange-traded funds.

They're making news, they're growing fast, and they're challenging the established order in the world of packaged investments for individual investors - by which we mainly mean mutual funds.

[Assets under management by exchange-traded funds have skyrocketed to $40 billion, from about $3 billion three years ago, with offerings by State Street Corp.'s investment arm accounting for about 75% of the market.]

But it's doubtful that exchange-traded funds, or ETFs, will ever live up to some of the breathless billing they've been getting of late. If they are truly going to take a lot of business away from mutual funds, they will have to present more clear-cut advantages and fewer uncertainties than they have so far.

Exchange-traded funds first appeared seven years ago in the form of shares in Standard & Poor's 500 Index funds that could be traded - as stocks are but traditional mutual funds are not - at any time of the business day. These are known as Spiders, or SPDRs.

ETFs are handy to use in short-selling, the sale of borrowed shares in hopes of buying them back later at a lower price, and in margin trading, for which investors put up as little as half the purchase price.

All in all, they are "a beautifully designed instrument," in the words of Jack Bogle, who as Vanguard's founder has been the prime architect of index mutual funds. "They may have some possible advantages over index funds.

"The problem with them is that they're used for all this rapid trading," Mr. Bogle says. "I don't want to be the only long-term investor in a speculative investment."

Wait a minute, ETF enthusiasts say, the new vehicles can be used for long-term purposes just as well as for short-term goals. In fact, the longer you hold them, the further their low annual expenses go to offset the cost of whatever brokerage commissions investors must pay. (Most standard index mutual funds can be bought with no sales charge).

Once the novelty wears off, though, it's not clear that a few basis points' difference in expenses will be enough to lure large numbers of investors away from index mutual funds.

Long-term investors seldom have much use for trading in the middle of the day, or for shorting and buying on margin. Their strategies typically rely heavily on automatic reinvestment of distributions and dollar-cost averaging through periodic additional investments - and for both of those purposes the mutual-fund format is ideal.

All ETFs so far have been built around indexes rather than managed funds. One of the big unknowns in ETFs' outlook is whether and how well they can be adapted beyond the index-fund setup.

About $9 of every $10 in stock mutual funds is still actively managed, by Vanguard's estimate.

At the same time, other innovators are working hard to try to put mix-and-match packages of stocks on the Internet, enabling investors to create their own diversified funds. This sort of thing looms as "a legitimate challenge to the fund industry, a stronger one than ETFs," says John Rekenthaler, research director at Morningstar Inc. in Chicago, a fund-tracking firm.

However their own story turns out, ETFs stand to benefit investors at large by giving traditional funds increased competition, pressuring them to cut expenses and keep their huge client base happy.

It is quite possible that ETFs will wind up prospering alongside mutual funds - in a development analogous to the way radio came to coexist with newspapers and then television with both.

"In many respects, ETFs do stand alone as a unique investment product," says Steve Leuthold, a Minneapolis investment analyst and money manager. "To that extent, the expected growth of ETFs in coming years should bring support to the stock market." If that happens, they will qualify for a full three cheers.

Mr. Currier is a columnist for Bloomberg News. The opinions he expresses are his own.

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