Buy the Basket

Exchange-traded funds are hot for good reason. They let you invest cheaply in diverse groups of stocks and bonds

Investors have been net sellers of stock mutual funds most of the summer. Yet in this abysmal market their love affair with exchange-traded funds, or ETFs, has truly bloomed. In June and July combined, stock funds saw estimated outflows of $60 billion, while ETFs had inflows of $11 billion. What gives them such allure? All the things that suddenly matter when markets turn rocky: diversification, tax efficiency, low costs and portfolio visibility that would make most fund managers blush.

ETFs are stock funds that trade on an exchange like common shares of IBM or Coca-Cola. The first ones were launched in...

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