BOSTON (MarketWatch) -- Exchange-traded funds continue to spread and they have many investor-friendly features, but the growing array of products and complex strategies means investors and financial advisers need to do extra homework when choosing ETFs.

"The ETF landscape is changing quickly," said Daphne Gu, a senior analyst at Boston-based investment firm FundQuest Inc. and co-author of a new industry report, "ETFs Are Not All Created Alike: How to Navigate the Rapidly Evolving ETF Landscape."

She expects the product boom to continue but said research points to financial advisers "overwhelmed by the large number of untested and unproven ETFs and by the complexity of the categories of ETFs."

At the end of August, there was $674 billion in 858 U.S.-listed ETFs, with 40 providers tracking 700 indexes. ETFs are baskets of securities that trade throughout the day on exchanges like individual stocks.

They attract different types of users. Some hedge funds and traders like the ability to quickly buy and sell entire slices of various markets. Meanwhile, low fees, index diversification and tax efficiency make ETFs suitable building blocks for asset-allocation strategies with varying levels of trading.

ETFs are no longer simply index funds tracking recognizable stock benchmarks like the S&P 500 and Nasdaq-1000. With one trade, investors can buy ETFs tracking gold, commodities and foreign currencies.

Also, leveraged and inverse ETFs, and actively managed funds have further altered the terrain.

Still, the ETF industry remains dominated by a trio of heavyweights. Barclays Global Investors, which is being acquired by BlackRock Inc. (BLK), has a 48% market share, according to FundQuest, followed by State Street Corp. (STT) with 24% market share and Vanguard with 11% share.

Other top-shelf financial firms are getting into the ETF business in a big way. Bond manager Pimco recently listed its first ETFs. And this week, Charles Schwab Corp. (SCHW) made a splash when it launched its first batch of ETFs featuring free online trades for its customers.

Do a deep dive

As the ETF industry matures beyond plain-vanilla index funds, investors need to be even more discriminating when selecting funds. Not all ETFs have low fees, for example.

With passively managed ETFs, investors need to make sure they understand how the tracking index works, said Tim Clift, chief investment officer at FundQuest, in an interview. Some indexes have objective rules, while others are managed by committees, he pointed out. How the indexes weight individual stocks and how they periodically "rebalance" the holdings are also subtle differences that can end up having a big impact on performance.

As ETFs move beyond tracking only stocks, there is more complexity when it comes to following their indexes. Some ETFs buy bonds and futures contracts. Therefore, there can be risks involved that some investors may not be aware of, Clift said.

Here is a list of other things to consider when choosing ETFs:

• Investors need to consider the impact on overall costs of any trading commissions to buy and sell ETFs.
• Take a close look at the ETF's index tracking error and how "liquid" it is by checking the bid-ask spreads and trading volume.
• When choosing stock ETFs, examine the sector allocations, which are typically a big driver of long-term performance.
• Leveraged and inverse ETFs certainly have legitimate hedging and trading applications, but they require even more knowledge because of their complexity and risks, and deserve close attention. "Leverage, designed to amplify an investment's results, increases risk," the FundQuest report said. "While the upside may look promising, it comes with the potential for a devastating downside, particularly in high-volatility environments such as during the recent market crisis. In addition, due to the compounding nature of these products, the return over holding periods of longer than one day may deviate significantly from what many investors expect."
• More investors are buying bond ETFs after the market meltdown, but be sure to check under the hood. Index tracking error and bid-ask spreads can be higher than stock ETFs. "Since bond benchmarks typically consist of thousands of issues, it is much harder operationally for a bond ETF to replicate benchmark performance with reasonable expenses," FundQuest says.
• Don't confuse ETFs with their cousins, exchange-traded notes, or ETNs. Although similar, the products have different credit risks and tax treatment.