International stock index ETFs attracted the most money, followed by growth-stock, fixed-income and commodities ETFs.

Expect this growth to slow this year, clouded by the stormy markets. The silver lining, however, is an opportunity for a bargain-hunter ETF strategy.

Traded on exchanges during market hours, ETFs replicate market indexes for low-cost diversification. There’s no minimum investment or penalties for redeeming. Annual fees are generally lower than those of mutual funds, though you do pay trading fees.

Although broad-index ETFs can be used to build a foundation for a portfolio, the greatest growth opportunities are in riskier specialized offerings, some experts said. For example, iPath MSCI India Index had a total return of 86 percent last year; Market Vectors Steel ETF rose 84 percent; and iShares MSCI Brazil Index gained 75 percent, according to Morningstar Inc. Those sorts of gains, however, could make them vulnerable to a fall.

ETF backers say they are coming of age.

In 2007, ETFs went from being vehicles that people were just discovering to being fully discovered, said Tom Anderson, head of strategy and research for Boston-based State Street Global Advisors, one of the largest ETF managers. They’re being used as a core portion of portfolios, with some investors building all-ETF portfolios because they can get pretty much every type of equity exposure they’re looking for.

Among the features of ETFs:

*ETFs invest in bonds. State Street rolled out the first municipal bond ETF last year, the SPDR Lehman Municipal Bond ETF, which tracks the long-term tax-exempt bond market. In junk bonds, it introduced SPDR Lehman High Yield Bond ETF.

*ETFs can be trendy. Claymore/LGA Green tracks the Light Green Eco Index of 225 companies with the best environmental performance trends in their industries.

*ETFs can be focused. FocusShares ISE-Revere Wal-Mart Supplier invests in stocks of companies that derive a substantial portion of their revenues from Wal-Mart Stores Inc.

Market climate

As with all investments, market climate makes a difference.

If the market persists in a bearish mode we will begin to see a contraction, with some ETFs or ETF families removed from the market, said Jim Lowell, editor in chief of The Forbes ETF Advisor and independent Fidelity Investors newsletters in Watertown, Mass. Since it’s going to be a tough year, our model portfolios are holding around 10 different ETFs to cover as many different areas within a market space as possible.

The market will deliver some of the best bargain-basement opportunities of the last five years, Lowell said.

There are a lot of cheap ETFs out there, and the farther up the market-capitalization ladder you go, the more reasonably priced they are, said Jeffrey Ptak, director of exchange-traded securities analysis for Morningstar in Chicago. It is fair to be vigilant about the economy and market, but we evaluate ETFs from a long-term perspective.

Bond ETFs, actively managed ETFs and further expansion into foreign ETFs are trends, Ptak said.

Full impact

Some experts urge investors to be careful.

The only caution I have with ETFs is that in a market with the volatility we’ve had recently, you experience the full impact of the indexes, said Ray Ferrara, president and chief executive of ProVise Management Group LLC in Clearwater, Fla. If you have a good active portfolio manager instead, you don’t own the full index and hopefully the manager does a good job of cushioning down markets for you.

In client portfolios where Ferrara includes ETFs, he uses them as the core portion, especially when clients are sensitive to fees. He said he adds some actively managed funds as satellites in the clients’ overall holdings.

Although mutual fund assets still dwarf ETFs’, could low-cost ETFs one day supplant conventional index mutual funds?

We’re seeing at least the tip of that iceberg, which was evident when Vanguard Group entered the ETF space last year with ETFs that cannibalized its existing index funds’ book of business, Lowell said, referring to the index mutual fund leader. For the future, as goes Vanguard, so will go the index fund business, because it is the one most vulnerable to ETFs.

ETFs are not widely held in company 401(k) retirement plans, which remain dominated by mutual funds. ETFs are traded throughout the day with transaction fees, so their inclusion in a 401(k) would require modification of existing record-keeping designed for mutual funds priced daily. In addition, the ability to buy and sell often loses its significance in a plan designed for long-term investment.

Andrew Leckey is a Tribune Media Services columnist.