Exchange traded funds (ETFs) are all "index" funds-they track the performance of a  benchmark. Most of the first ETFs tracked well-known benchmarks like the S&P 500 or the Dow Jones Industrial Average. Now that most of the famous market indicators are taken, many recent funds have tracked enhanced indexes-and have become rules-based in the stock picking area, paraphrased from Ian Salisbury in the WSJ online.

An example is PowerShares’ Intellidex Index, which rely on algorithms to pick stocks. Ignites mentions that funds with "enhanced" indexes may entail greater risk than conventional index funds. Investors should be sure to know what they are getting into before purchasing any investment.

Individuals, advisors and institutions will continue to buy ETFs regardless of their index style because they can always see the underlying stocks in the index (different than actively managed funds). The jury is still out whether "fundamental" indexes will outperform traditional indexes and if there will be negative tax implications to the higher turnover in the fundamental indexes.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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