Feb. 26 (Bloomberg) -- The market for exchange-traded funds looks suspiciously like the ``let's take it public'' days of the dot-com mania at the end of the 1990s.

Asset totals for these publicly listed baskets of securities jumped fivefold to $422 billion in the half-decade through the end of last year.

That pales in comparison with the more than $10 trillion in conventional mutual funds. Yet last year's exchange-traded growth represented more than 40 percent of all dollars placed in ETFs since 1993.

Exchange-traded funds are index-based products that allow you to buy shares in a portfolio of securities. Like index mutual funds, they can own large pieces of markets or a small slice.

ETFs are flying off the shelves of financial-services firms like snowblowers after a blizzard. More than 150 new products were offered last year, bringing the total number of funds to 357; some 300 are registered to start in 2007.

Even more telling is how they are being marketed to small investors. At the World Money Show in Orlando, Florida, three weeks ago, there were seven sessions covering ETFs, compared with none last year. With almost 11,000 participants, the show caters primarily to individuals.

For a product that barely existed a decade ago, the ETF boom is pumping life into mutual-fund firms, deep-discount brokers, investment advisers and start-ups. For individual investors, who are blindsided by the risks and costs of touted new vehicles, the benefits are often obscured by the marketing pitches.

Sub-Specialties Offered

It's easy to arch an eyebrow over how much the new ETFs slice and dice industries.

Do you want to buy stocks to exclusively invest in treatments for endocrine disorders? Interested in profiting from climate change or private equity? How about dermatology, wound care and the genitourinary system, treatments only for the reproductive and urinary organs? New offerings are in the works.

How about Latin American companies paying dividends or U.S. livestock futures? There are even more ETFs sitting in the Securities and Exchange Commission registration inbox. You will also be able to short specific stock-market holdings according to company size and industry.

While all of these specialized bets may be paradise for investors who don't want to pick individual stocks, they encourage speculation and may spark a new wave of day trading.

If you are obsessed with a distorted, casino view of markets -- meaning you can beat the market and win consistently -- the ultra-specialized ETFs are genuine enablers.

Right Investing

``Are we giving individual investors another bullet with which to shoot themselves in the foot?'' says Tom Lydon, founder of ETFtrends.com, a Web site and blog that focuses on ETFs. ``With a certain number of investors, you don't have to give them a bullet.''

Lydon, who is also president of Global Trends Investments, a registered advisory firm in Newport Beach, California, argues that the profile of ETF investors is largely positive.

``The majority of ETF investors are somewhat responsible,'' Lydon says. ``About one-third are institutional investors, one- third financial advisers and one-third individuals.''

He says individuals can keep an eye on risk when jumping into the ETF world, obeying target prices for stopping losses or following 200-day moving averages.

The Price Tag

The increasing sub-specialization of these funds is coming with an ever-higher price tag. One of the virtues of ETFs has been their low cost. Yet as they package even smaller segments and sub-sectors of the market, some cost efficiencies are lost.

Take the HealthShares Diagnostic ETF, which focuses on companies that make medical diagnostic devices. Run by XShares Advisors LLC in New York, the ETF had only 22 stocks in its holdings as of Feb. 22, according to data compiled by Bloomberg. It costs 0.75 percent a year to manage the HealthShares fund.

For three-quarters less in annual expenses, you can own more than 250 health-care stocks -- a lion's share of the industry -- through the Vanguard Health Care ETF.

Since ETFs are bought and sold like single stocks, they carry bid-ask spreads, which is the difference between the best buying and selling price for any security. And, unlike most no- load mutual funds, exchange-traded funds generate a broker commission each time you buy and sell.

That means the more you trade, the greater the likelihood the broker will profit from getting a better market price than you do. As with any other security, the chances that you will correctly time the high price to sell and the low point to buy aren't in your favor.

Best ETFS

Not all ETFs are pre-packaged poker games, though. A handful of them offer diversification at low cost.

Want to own a proxy for the entire U.S. stock market? A good holding would be the Vanguard Total Stock Market ETF. The U.S. bond market can be represented by investing some money in the iShares Lehman Aggregate Bond Fund, a staple in my 401(k) account.

There's a virtue in assembling the most broadly diversified ETFs for your retirement, if only because the costs are rock- bottom and you can buy and hold them through any discount broker.

Even if you aren't placing ETFs in your tax-deferred accounts, the advantages -- they typically generate few or no capital-gains levies -- make sense for your taxable vehicles.

Time will tell whether ETFs make the 1990s day-trading days look like lessons that were totally ignored. Then again, most investors have amnesia when it comes to investment folly.

(John F. Wasik, author of ``The Merchant of Power,'' is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: John F. Wasik in Chicago at jwasik@bloomberg.net.

Last Updated: February 26, 2007 00:11 EST