Investors can't seem to get enough of exchange-traded funds (ETFs). In the mid-1990s, less than two dozen of these funds were trading on the American Stock Exchange. Today, more than 600 different ETFs -- worth over half a trillion dollars in total market value -- trade on all the major U.S. exchanges. In fact, ETFs are the fastest-growing segment of the fund market. Investors poured some $146 billion into the 291 new ETFs that debuted last year. That's an average of nearly 25 new exchange-traded funds per month (versus only four new closed-end funds per month).

And the good news for income investors is that ETFs have come a long way since the first dividend-focused ETF arrived on the scene in November 2003. Today, there are scores of these funds for the yield-hungry investor to choose from, with some two dozen offering yields of up to 10% and higher. In addition, exchange-traded funds offer several advantages over their mutual fund and closed-end fund counterparts.

ETFs' Lower Fees Mean Higher Gains
ETFs have consistently lower fees than both mutual and closed-end funds. The average ETF in Morningstar's database has an expense ratio of just 0.43%, while the average mutual fund carries an expense ratio of about 1.5%. Meanwhile, closed-end funds average expenses of 1.3%.

ETFs track a specific index and seek the same returns as that index. They simply invest in the securities of companies that are included in a market index or they may only purchase a representative sample. As a result, they don't require a bevy of expensive research analysts and a top-dollar manager, cutting out a tremendous amount of overheard -- and expenses.

What can this mean for your portfolio? If you made a $100,000 investment in an average expense ETF and the same investment in a mutual fund, you would save a total of $127,883 in fees after 30 years (assuming +10% annual growth) -- an additional +127.9% return on the original investment. Obviously, expenses make a big difference.

Tax-Efficient Income  
Meanwhile, ETFs must distribute at least 98% of their earnings and capital gains each year as dividends to shareholders to avoid paying federal taxes.  And since most ETFs are designed to track an index, their portfolios have a much lower turnover than more actively managed funds. As a result, ETFs tend to have fewer capital gains payouts, which can trigger extreme swings in the share price (as well as a hefty tax bill) that can drag down returns.

And most ETF dividends qualify for the 15% dividend tax rate, making these funds suitable for a taxable brokerage account  Income from bond and REIT ETFs, however, may be taxed at your ordinary income rate of up to 35%, so these funds should be held in a tax-advantaged account if possible.

Safety and Liquidity
While ETFs are similar to mutual funds in that they carry a basket of stocks, they also carry another advantage. Traditional mutual funds are only priced at the end of the day, while ETFs can be bought and sold at any time throughout the trading day just like a stock. Many have average daily trading volumes in the hundreds of thousands (and in some cases millions) of shares per day, making them extremely liquid. And ETFs' numerous holdings give you the kind of diversified protection you can't get from a buying a single stock.  

As we said earlier, the advantages of investing with ETFs has not been lost on investors, as evidenced by their soaring popularity. And while many may be looking to invest in exchange-traded funds, it's nearly impossible for an individual investor to keep track of the more than 600 ETFs and know which ones are winners and which are "also-rans."

That's why StreetAuthority dedicated its efforts to bringing you the best fund ideas in The ETF Authority newsletter. Each issue, editor Nathan Slaughter brings you in-depth profiles of which funds are solid ideas in the current environment, interesting new ETFs that are hitting the market, and his top pick -- the "Fund of the Month."

Whether you're an experienced fund investor who already knows all the ins and outs but could use a little help in finding exciting opportunities, or a novice investor looking for a great publication to jumpstart your fund investing career, The ETF Authority will have something for you. To learn more, please visit this link.