Index funds have long been touted as a great way for investors to get broad diversification at a low cost. Our Just-the-Basics strategy uses index funds to create an extremely low-maintenance way to get returns close to what the overall stock market produces. They're efficient, effective, and easy to use.

Exchange-traded funds (ETFs) are a relatively recent addition to the stock indexing idea. While ETFs have actually existed since 1993, they've really exploded onto the scene in the past six years. With over 160 different varieties now available, and total assets in the neighborhood of $250 billion, it's clear ETFs are here to stay, and in a big way.

Like traditional index funds, ETFs offer a convenient way to invest in a pre-assembled basket of stocks. Each ETF is designed to track a particular market index or sector of the economy. While ETFs share many characteristics with traditional indexed mutual funds, there are some key differences. Whether those differences make ETFs more or less compelling depends largely on the specific circumstances of each potential investor. Here's a look at the pros and cons as a typical individual investor would evaluate them.

Advantage #1: ETFs trade like individual stocks. Flexibility is one of the main selling points of ETFs. Unlike mutual funds, which are priced and available for purchase only at the end of each trading day, ETFs trade continuously throughout the day like individual stocks. You can also do other things with ETFs that are very "stock-like": buy them on margin, short them, use limit and stop orders. All of these are very appealing to active traders and professionals, but are of questionable value for most individuals. After all, the primary goal of many indexers is simply to buy and hold "the market" as represented by their collection of index funds. If that's true of you, being able to buy at the 1:38pm price rather than the 4:00pm closing price probably isn't very important.

Advantage #2: There's an ETF for virtually anything you want to index. The stock market is a lot like baseball: there's a statistical measurement for everything that happens. As a result, there are many different stock indexes, each measuring a slightly different slice of the market. As ETFs have become increasingly popular, the companies that create them have responded by designing ETFs to track almost any index available. It's easier to invest in certain market niches using ETFs than traditional index funds, simply because in some cases there aren't any index funds following the less prominent indexes and market segments.

Again though, for the average investor, the relevant question is how finely do you really need to slice the market? While an institutional investor might have a need to closely track just the "value" stocks segment of a particular mid-cap index, most individuals aren't likely to need such specific coverage. The many traditional index funds that track a wider range of stocks can be easily combined to provide excellent full market coverage, which should be the goal of most individual indexers.