ETFs are similar to open-end mutual funds in that an ETF is really a basket of stocks. However, unlike open-end mutual funds, ETFs trade on the various stock exchanges and are bought and sold just like stocks. Because ETFs trade like stocks, they can be bought and sold intraday. This differs from open-end mutual funds, which are priced at the end of each day.

In addition to their trading flexibility, ETFs generally have very low expenses. And because all ETFs are based on underlying indexes, there is complete transparency with ETFs; that is, an investor knows exactly what he or she owns when holding an ETF.

ETFs have not only grown in assets, but also in market coverage. Today, there are ETFs that track such well-established indexes as the Dow Jones Industrial Average. the S&P 500 and the Russell 2000. There are ETFs that track specific sectors, such as industrial (XLI), health care (IYH) and technology stocks (XLK). There are ETFs that track foreign stock indexes and commodities–even ETFs that track fixed-income indexes.

In short, with few exceptions, an investor who wants to cover virtually every investment style box can do so with ETFs.

From a DRIP perspective, however, the one problem with ETFs is that there has never been a way to buy ETFs directly, without a broker. Yes, some ETFs allow dividend reinvestment once you own the shares. However, up to this point, no ETF permits either direct purchase or optional cash investments directly.

Fortunately, that is about to change. Nasdaq Global Funds recently announced that it is working to allow investors to buy shares of its Nasdaq 100 index ETF, also known as the “Cubes,” directly, without a broker. The program, which Nasdaq hopes to have up and running shortly, seems to be fashioned after traditional direct-purchase plans.

Under the proposed plan, investors will send investments to an entity hired by Nasdaq (probably a transfer agent), where the money will accumulate and eventually be invested on behalf of investors. According to a Nasdaq spokesperson, the fees are expected to be in the $1 to $2 range for purchases in the program.

If the pilot program with the Cubes is successful, it could be expanded to include other Nasdaq ETFs that invest in American depositary receipts (ADRs) of international company shares.

The move to make direct purchase available for ETFs makes sense. Most investors view open-end mutual funds as perfect “dollar-cost averaging” vehicles since no-load funds don’t charge sales fees. Currently, ETFs, with their upfront brokerage fees, make dollar-cost averaging less palatable for smaller investors. Indeed, it doesn’t make much sense for a small investor to invest, say, $50 per month in an ETF if he or she gets charged a brokerage commission of $15 or more for each purchase.

A move to direct purchase would allow ETFs to compete more directly with mutual funds for investors and investment advisers who like index funds and dollar-cost averaging.

You can rest assured that if Nasdaq’s pilot program is successful, you will see other ETF sponsors (prominent exchange-traded fund sponsors are Barclays. State Street and PowerShares) follow suit and create direct-purchase plans for their ETFs.

Such a development would be especially exciting for DRIP investors since it would provide a low-cost and DRIP-like way to invest in such areas as small and microcap stocks, international stocks and even bonds. Stay tuned.

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