Suze Orman Money Matters

It's back.

Market risk, that is.

After a great start to 2006, June ushered in a summer swoon that's still simmering. Some major indexes had a great bounce-back at the end of July, only to start cooling again as I write this. And with so much economic and political turmoil brewing, it's hard to imagine that this risky roller coaster ride is going to stop anytime soon.

That doesn't mean I advocate heading for the sidelines. I still believe that stocks make sense for your long-term goals. A well-diversified core portfolio of stocks or funds that gives you global exposure is the way to go.

But now is also a great time to clue you in to an interesting way to navigate the turbulent markets -- namely, exchange-traded funds (ETFS), which trade index funds just like stocks.

The ABCs of ETFs

By now, you're probably aware of the big, broad-based ETFs that track the S&P 500, such as the Standard & Poor's Depositary Receipts (SPY). I want to talk about some lesser-known ETFs -- many brand spanking new -- that take a specialized approach by either focusing on one particular market sector or offering a neat hedge for dealing with today's volatility.

While it's true that some of my favorite ETFs are kissing cousins to existing mutual funds, I think ETFs can be a more compelling investment. In case you haven't been paying attention the past few years as ETF popularity has exploded, here's a quick rundown of their best attributes:

• They trade like a stock.
  

  An ETF looks and feels just like a mutual fund, but unlike a fund, whose price is set once at the end of the trading day, an ETF trades constantly when the exchanges are open.
  

  That means if you want to sell at 10:45 a.m. ET, you'll get the price based on the value of the ETF's underlying securities when you place the order. Do the same with a mutual fund and your order will be executed on the price of the portfolio after the market closes at 4 p.m. ET.

• They provide better control over taxes.
  

  By law, mutual funds are required to pass along realized capital gains to their shareholders. While index mutual funds rarely have these distributions, actively managed mutual funds must pass along taxable distributions to their shareholders, and that reduces your net return.
  

  With an ETF, your chances of being hit with taxes are greatly reduced. Unless the underlying holdings in an ETF's portfolio are changed -- and it thus incurs a gain -- the only time you'll be hit with a tax bill is when you choose to sell your shares, or if the ETF happens to make a dividend distribution.

• They cost less.
  

  Many ETFs offer annual expense ratios that beat mutual funds. That means more money in your pocket.
  

  Of course, there's one big caveat here: An ETF doesn't work so well if you invest in that ETF every few weeks or months. Because they trade just like a stock, you must pay a commission to buy and sell ETF shares. Even if you work through a discount brokerage, that's going to eat into your returns. The best way to use ETFs is for lump-sum investments.

The ETF Hedge Edge

If you think the stock markets are going to continue to go down, listen up: There are now a handful of ETFs that allow you to short some major market indexes. That is, when those indexes go down in value, the share price of a short ETF goes up.

The ProShares ETFs have an interesting mix of possibilities to fit your personal market outlook. Its SH ETF gives you 100 percent of the inverse return of the S&P 500; or you can opt for the SDS offering, which provides 200 percent of the inverse of the S&P 500's return. The PSQ and QID ETFs aim to provide the same inverse performance for the Nasdaq-100 index.

If you happen to think the markets are reaching bottom and are ready to rebound, you might want to consider some other ProShares ETFs that magnify any market gains. The SSO and the QLD aim to provide a return that is 200 percent of the return of the S&P 500 and the Nasdaq 100, respectively.

Going for the Gold (or Silver)

It's been hard not to take a shine to gold lately. In the past year, an ounce of the precious metal has shot up from under $450 to more than $646 as I write this. And plenty of bullion bulls think it could go to $1,000 an ounce.

If you have the gold bug, ETFs are a far smarter entry than betting on a single gold stock. For example, I found it interesting that when Newmont Mining (NEM), a leading gold stock that's often seen as a proxy for the gold market, took a hit because its robust earnings report for the second quarter fell short of Wall Street expectations, the price of gold that day actually rose.

If you'd used Newmont as your bullion play, you would have been caught up in the Wall Street earnings circus. Instead, you can go for the gold directly with the streetTRACKS Gold Shares ETF (GLD). It invests in gold bullion, not gold stocks. For those of you who would rather play silver, the iShares Silver Trust (SLV) ETF is just for you.

One important stipulation: According to the IRS, gold bullion is considered a collectible, so any long-term capital gains when you sell shares of GLD will be taxed at a maximum 28 percent rate rather than the typical 5 percent or 15 percent max rate you pay on gains for regular stock investments.

Hot Commodities

The global appetite for natural resources has been a boon for commodity stocks over the past year. So, not surprisingly, you can add a commodity slice to your overall portfolio with an ETF. The United States Oil Fund, LP (USO) is a way to invest in oil if you're among those who believe it's going to continue to go up (some think it'll go as high as $100 a barrel).

The Deutsche Bank Commodity Index Tracking Fund (DBC) was the first commodity ETF to launch. It uses future contracts to track a commodity index with six broad investment areas: crude oil, heating oil, aluminum, gold, corn, and wheat. A newer commodity ETF, the iShares GSCI Commodity-Indexed Trust (GSG) tracks a Goldman Sachs commodity index.

One note: Due to some structural quirks, commodity ETFs may make taxable distributions to shareholders, so they're best used inside tax-deferred accounts.

The List Goes On

From currency ETFs that track the Euro or emerging markets in countries like Brazil, Russia, and Mexico to those that let you to take a ride on the Dow Jones Transportation Average Index (IYT), there's no shortage of specialty ETFs to choose from.

Just remember a couple of things:

• If you anticipate moving in and out of an ETF fairly frequently, be sure to check its average daily volume. Some of the newer ETFs have yet to build up a lot of trading interest.
  


• Take the time to find out exactly what an ETF is invested in, and beware -- some of the underlying indexes are heavily weighted in just a few stocks. For example, the Energy Select Sector SPDR (XLE) ETF holds 30 energy stocks, but ExxonMobil and Chevron account for more than 27 percent of its total assets.

To learn more about ETF basics, check out the Yahoo! Finance ETF Center.