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Warming Up to Funds That Trade Like Stocks

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For most of her investing life, Reta Richardson managed money in a conventional way: she sought the advice of a broker, in her case a Merrill Lynch adviser. When she retired in 1999, Ms. Richardson of Ninety Six, S.C., decided to pilot a portfolio of individual stocks on her own.

Now, at 68, she is experimenting with a third approach. Tired of spending six hours a day researching stocks and mutual funds, and wanting to spend more time with her 17-month-old grandson, Richardson is selling what had been a 102-stock portfolio, worth about $211,000, and putting the money into a low-cost and low-maintenance collection of about nine exchange-traded funds.

“By June or July, I hope to be near my goal of making a total ETF portfolio,” she said.

Exchange-traded funds, or E.T.F’s, are hybrid securities that have characteristics of both stocks and mutual funds. Like stocks, these funds trade on an exchange, so investors can buy and sell shares throughout the day, not just once a day at the closing price. But. like those of traditional index funds, the shares represent a basket of dozens — or even hundreds — of securities, typically those that make up an index like the Standard & Poor’s 500 or more specific benchmarks like the Dow Jones consumer noncyclical sector index. Moreover, like index funds, they charge low annual fees.

Since exchange-traded funds were created in 1993, they have been used primarily by institutional investors and active traders. Shares of one of the most popular ETF’s, the Nasdaq 100 Index Tracking Stock, known as QQQ’s, for its ticker symbol, are often used by aggressive investors to jump in and out of the volatile technology sector.

But after the creation of the first United States bond ETF’s two years ago and, more recently, the scandals in the traditional fund industry, some buy-and-hold investors have been warming to these hybrid alternatives.

In December, investors poured $12.6 billion of new money into exchange-traded funds, according to the Investment Company Institute, and industry trade group, pushing the funds’ total assets to more than $150 billion for the first time. Although that is much less than the $7 trillion invested in traditional mutual funds, the December inflows were nearly on par with investments in traditional stock funds. By the end of January, assets had grown to $155.8 billion.

Investors can choose among 132 exchange-traded funds, up from 30 in 1999. Many financial advisers say investors can build a diversified portfolio with ETF’s alone.