ETF Watchers Weigh Innovations

They said the tax and trading advantages of index ETFs will carry over to the active versions but noted that some new ETFs are more appropriate as satellite holdings than as core holdings.

"If it's a good wrapper or index, it maybe even a better wrapper for active," said Jim Wiandt, president of Index Publications and IndexUniverse.com.

Richard Ferri, ceo of Portfolio Solutions, welcomed ETF innovation but warned that leveraged ETFs can be dangerous, as they carry twice the volatility of the market. He said they should not be core holdings. Rydex Investments recently launched four leveraged sector ETFs.

Ferri added that newer indexes from companies such as MSCI Barra are designed with ETFs in mind--they are made to be more than benchmarks. He said the indexes have features that limit turnover and cut trading costs for ETF investors.

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