(FORTUNE Magazine) – You've been here before. It's 2 P.M., and tech stocks are going wild. Clicking through market stats, you marvel at the price action, admitting reluctantly that no matter how much you'd love a piece of Nortel or Cisco, the roller coaster is just too intense to start buying individual stocks right now. You could go the mutual fund route, but that takes paperwork. Besides, most sector funds carry huge expense ratios--Amerindo Technology, for example, has a 2.25% ratio--and high turnover will drive your accountant crazy at tax time. So you spend the day stranded on the sidelines of the bull market. Sound familiar?

Enter Technology SPDRs (Standard & Poor's depositary receipts, known in Wall Street vernacular as "Spiders"), one of a handful of exchange-traded funds that have become the latest investing craze. For $55 you can buy a single share representing 89 tech companies in the S&P 500--Cisco and Nortel among them--minus the worry about putting all your eggs in one basket or the hassle of picking the right fund. The Tech Spider is up 60% over the past 52 weeks and has seen assets pass the $1 billion mark. A comparable unit called a Qube, which tracks the red-hot Nasdaq 100, is up 100% since its debut last March and has collected more than $9 billion in assets.

While index funds are happily familiar to most retirement-minded investors, traded funds are a surprising improvement over the lot. The first Spiders were launched in the early '90s to track the S&P 500. Since then the number of similar investments has grown to 30, with traded funds that mirror Nasdaq's biggest companies (Qubes), the Dow Jones industrial average (Diamonds), and 17 foreign market indexes (Webs, short for World Equity Benchmark Shares). Another 47 traded funds that will track everything from real estate to emerging markets are due out this year from Barclays Global Investors. Barclays is also advising the New York Stock Exchange and its counterparts in Germany and Japan on the launch of the S&P Global 100, index shares for the world's largest companies. And the competition for listings among the exchanges is growing ever more fierce.

It's driving the fund industry crazy.

Why? Because with this new breed of financial instruments, you can have your fund and trade it too, so to speak. Like index funds, Spiders, Diamonds, and Qubes offer instant diversification and low costs (0.18%). Like stocks, they can be purchased and unloaded at the drop of a hat. They can even be bought on margin or sold short. All you have to do is pay your regular brokerage commissions. There's no waiting till 4 P.M. to change your holdings. Once owned, your shares rise and fall with the underlying index. You can sell that day or hold on for years. (A caveat, however: Traded funds aren't a great idea for investors who dollar-cost average--the practice of buying a few shares each month--because commissions will eat into the total investment.)

No wonder exchange-traded funds are drawing billions of dollars away from actively managed mutual funds. They can be perfect tools for negotiating today's wild market. The trick, say experts, is to use them as opportunistic investments, sort of like sending in Navy SEALs for a targeted attack. Assuming the bulk of your portfolio--a mix of stocks, bonds, and funds--will move in step with the broader market, traded funds should be deployed to take advantage of market dynamics like a tech rally or a sudden recovery in mid caps. In fact, they're great in the split-market environment we seem to be facing now, in which a few tech stalwarts rise through the roof and everything else heads for the cellar. Nor should you be afraid of using them to further diversify your portfolio.

Jim Pritchard, a financial planner in Durango, Colo., advises clients to forget individual stocks and (most) managed funds and instead spread their assets across the traded-fund universe, essentially creating a global index fund. His typical portfolio for a long-term investor with $100,000 looks something like this: 63% in a traditional Spider (which tracks the S&P 500), 10% in the more aggressive mid-cap Spider, and 20% divided between six European Webs and one in Japan. The remaining 7% of your investment portfolio, says Pritchard, should go into a small-cap mutual fund for now because a proxy traded fund is still in development.

For clients with a penchant for bargains, he suggests keeping some extra cash on the side in order to take advantage of dips in the market. It's important, however, to avoid buying traded funds with overlapping holdings. Spiders, for example, have many of the same stocks as Qubes, though the former tend to be less volatile.

More aggressive investors might want to consider a two-pronged attack that exploits the strength in techs and the bizarre weakness in everything else. First, wait for a 10% correction in the Nasdaq, then jump in and buy Qubes or tech Spiders and hold them for the long term. (Yes, even the highflying techs have their hiccups.) Financial planner David Root says building a position in Qubes starting at 10% and growing to 25% is a good way to capitalize on the market's trend. Second, get ready to buy some cyclical Spiders or Dow-tracking Diamonds. Boring old-economy stocks, you say? Perhaps. But once the Federal Reserve is done chilling the economy, Caterpillar and J.P. Morgan may steal back a piece of the spotlight, if only for a moment. When that happens, you could be sitting in front of your computer staring at a big gain in your portfolio.

To be certain, critics will imply the rush toward traded funds is another example of our sad devolution into day traders and market timers. The contrary, however, is true. Though there's no doubt traded funds are used as a way to time the fast-moving market, most day traders would be frustrated by the modest potential of an index fund, whether it's traded or not. Rarely will an index pop like Juniper Networks, for example--up 1,900% nine months after its IPO.