Second of two columns on exchange-traded funds.

Exchange-traded funds are marketed as a dirt-cheap, tax-efficient way to invest in a broad basket of stocks.

That they are.

But some people fear they could turn long-term index-fund investors into trigger-happy day traders.

ETFs trade throughout the day, just like stocks, on the American Stock Exchange. Regular mutual funds can only be traded at the closing price, which eliminates intraday trading.

Unlike traditional funds, ETFs can also be sold short — a risky way to bet on market downturns — and bought on margin, another perilous strategy using borrowed money.

Vanguard Group founder John Bogle has said ETFs are like handing an arsonist gasoline and a match.

Bogle no longer runs Vanguard, which plans to introduce nine ETFs nicknamed Vipers later this year if it can resolve a legal dispute with Standard & Poor’s about licensing S&P’s name and indexes.

Vanguard initially resisted offering ETFs, fearing they might encourage speculation. But now it says ETFs will benefit long-term shareholders by moving frequent traders out of its regular mutual funds, where they drive up expenses for everyone, and into ETFs, where shareholders pay their own trading costs.

Short-term investors inflict harm on long-term investors in a regular mutual fund, says Morningstar analyst Frank Stanton. Short- and long-term investors can exist peacefully in an ETF.

Presently, all ETFs are index funds, which own baskets of stocks that mirror market barometers ranging from the broad-based S&P 500 to the specialty Dow Jones Internet index.

There are already 58 ETFs, with $47 billion in combined assets, listed on the Amex, with more coming every day. Yesterday, State Street Global Advisors. which manages the original Spider ETF, announced two new ETFs tracking companies in the Fortune 500 and the new-economy Fortune e-50.

ETFs appeal not only to short- term, aggressive market timers, but also to buy-and-hold investors who make lump-sum contributions. They are not ideal for investors who make smaller, more frequent investments. Here’s why:

To buy an ETF, you must go through a brokerage firm and pay a commission ranging from less than $10 at some online brokers to $40 and up at full-commission firms. You pay a commission on every investment, no matter how small.

By comparison, plenty of no- load mutual funds let you invest small amounts at regular intervals without paying any commission.

The brokerage commission on ETFs is somewhat offset by the fact that they usually charge shareholders lower annual fees than regular mutual funds.

For example, the cheapest traditional fund, Vanguard 500 Index Trust, charges 0.18 percent per year, or $1.80 per $1,000 investment.

A similar ETF from Barclay’s Global Investors — the iShares 500 — charges only 0.095 percent, or 95 cents per $1,000 investment per year.

The cost savings really add up over the long term.

ETFs are cheaper to run than regular mutual funds because they only deal with a handful of institutional investors who trade in creation units, which are $5 million to $10 million blocks of stock. Each creation unit usually contains 50,000 retail shares in the ETF.

Institutional investors such as Morgan Stanley Dean Witter act as wholesalers. They buy creation units from the ETF manufacturer (such as Barclays or soon, Vanguard), then split them up and sell them in smaller pieces to their retail customers.

Regular mutual funds sell and redeem shares directly with their shareholders, which costs more than dealing with a few large customers.

Other differences: ETFs don’t have to keep much cash on hand to meet shareholder redemptions, or to sell some of the fund’s stock holdings to meet redemptions when they run out of cash.

This makes ETFs more tax efficient than regular funds because they realize fewer capital gains that have to be distributed to shareholders each year. Most shareholders don’t like to get capital gains because they are taxable in the year received.

ETFs tend to keep their capital gains in the fund, and investors pay taxes when they sell their fund shares. So it really comes down to paying the tax man now or later. ETFs offer an advantage for people who would rather pay later.

Probably the biggest knock on ETFs is that they don’t always trade at net asset value, like regular funds do. NAV is the value of all a fund’s stock holdings divided by the number of fund shares outstanding. It is the price mutual fund investors should rightly expect because it represents their pro-rata share of the fund’s assets.

Closed-end mutual funds, which also trade like stock on exchanges, frequently trade at substantial discounts or premiums to net asset value, and that’s one reason they’ve never become hugely successful.

Why? Suppose you buy a fund at a premium to net asset value. If the premium shrinks — or even worse, turns into a discount — you’ll have less money, regardless of the fund’s performance. Conversely, if the premium widens, you’d have more money. But many investors don’t like that added risk and complexity.

ETFs were designed to trade at NAV, like regular funds, and most of them usually do.

But some ETFs, mainly those based on foreign-stock indexes, sometimes sell at premiums and discounts.

ETF promoters don’t generally publicize this fact and say it’s mainly because of differences between the time foreign stock markets close and the time the funds are priced.

But Mercer Bullard. founder of the shareholder advocacy group Fund Democracy. says there’s another reason. The arbitrage mechanism (that’s supposed to keep ETFs trading at NAV) works imperfectly, he says.

At the behest of consumer groups, Barclays of San Francisco agreed in May to publish premiums and discounts for its ETFs on its Web site (www.ishares.com ), but it hasn’t yet done so.

Barclays continues to downplay the problem, Bullard says.

He concedes that ETFs generally trade at smaller premiums and discounts that comparable closed-end funds. And in general, he likes ETFs.

They take index investing to a new level, Bullard says. They provide investors a low-cost, easy way to access the market. The downside is they hold out the possibility of being abused by investors who want to engage in short-term trading. He thinks that problem could be overcome by education.

One other thing investors should be educated about: Some ETFs are not technically mutual funds, but unit investment trusts.

UITs can only reinvest dividends quarterly, whereas mutual funds can reinvest them every day. When markets are rising, this gives mutual funds an advantage over UITs. But when markets are falling, the edge goes to UITs.

Also, UITs do not have have a board of directors who are supposed to look out for shareholders; mutual funds do.

The iShares and the Select Sector Spiders are mutual funds.

The original Spider 500 ETF, the MidCap Spider, the Diamonds (tracking the Dow Jones industrial average) and the Nasdaq-100 Trust all are unit investment trusts.

Given a choice between the Spider 500 and the iShare 500, which both track the S&P 500, Stanton says he’d choose the iShare.

It’s cheaper (fees are 0.095 percent annually versus 0.12 percent for the Spider) and it’s structured like a mutual fund instead of a UIT.

However, he might hold out for the forthcoming Viper 500 from Vanguard.

Vanguard is bar none the best index tracker, says Stanton. Its index guru, Gus Sauter, has done a phenomenal job of tracking the index. In some years, he has even outperformed the index. Those index funds are so large they’ve been able to strike lucrative deals with brokers, and Vanguard passes on those savings to customers.

He says Barclays is a large money manager — bigger even than Vanguard — but most of its experience is with international investing.

Vanguard’s S&P 500 fund has outperformed Barclay’s institutional S&P 500 fund by a good margin over the last couple years, Stanton says. The proof is in the pudding.

You can get a list of ETFs, including their ticker symbols and other information, at www.amex.com. Under Links of Interest click on Amex securities, then on Amex Index Shares.