How long has the ETF and the index it tracks been around?
You really don’t want to invest in an ETF that hasn’t been around at least three years. If it’s younger than that, it’s just too soon to tell whether or not it’s worth investing in.

With newer ETFs, be wary of “back-tested” results, or results the fund may have achieved in the past if the ETF existed before it actually started trading. Providers can cherry pick the time periods they use in their back tests to make their strategies look good, says Dan Culloton, senior analyst at Morningstar. Barclays Global Investors, State Street Global Advisors and Vanguard are some of the most experienced ETF hands.

How long has the ETF provider been around?
Barclays Global Investors, State Street Global Advisors and Vanguard are some of the most experienced ETF hands. There are some newer players backed by smart people, like WisdomTree, but we’d still wait until their funds have a longer track record before we jumped in.

How is the ETF’s index structured?
You can find this information inside the fund’s prospectus, which is usually available on the website you’re buying the fund on or on the fund company’s website directly. Or check the SEC’s website.

While ETFs that track long-standing indexes such as the S&P 500 and Russell 3000 have stood the test of time, many ETF creators are stretching the definition of indexing (in fact, some ETFs are beginning to look more like actively-managed mutual funds, complete with higher costs). Meanwhile, some have cooked up new indexes that track arcane segments of the market: PowerShares, for instance, offers an ETF that tracks the performance of companies in the nanotechnology industry. That’s pretty narrow – and risky. Others have created ETFs on new methodologies that are still quite young. For instance, WisdomTree Investments offers ETFs that weight companies based on their dividends and earnings.

If you’re new to investing and have a limited amount of money to invest, we’d recommend sticking to basic funds that cover wide swaths of the market, such as the Vanguard Total Stock Market ETF, which covers the entire U.S. stock market; iShares MSCI EAFE, which tracks the international markets, and the iShares Lehman Aggregate Bond ETF. There are plenty of other fine ETFs available; these are just a few.

Want to Know More?

• What's an ETF?
• Who Should Buy an ETF?
• Getting a Great Deal on an ETF