Exchange Traded Funds (ETF)

I have been a reading a lot of good stories about Exchange Traded Funds (ETF's) and have been trying to understand more about this instrument. There are a lot of explanations available on the web but here is a simple one - An ETF is a basket of stocks that is traded like any other stock in the market. The basket could be defined by a sector or sub-sector. So, how is ETF different from an index fund? Index funds track an index but getting in and out is not easy. Index fund units are bought and redeemed from a mutual fund company and not on the open market whereas EFT can be traded just like a regular stock. ETF can give me the diversification and flexibility but how do I know which EFT to buy. Do I just go by the past performance? What kind of research goes into forming and evaluating an ETF? Well, forming part is easy - define a bucket and someone like Barclay's would do that for you. Doing the research is still an involved process - Is ETF tracking the Energy sector a good buy?There is a lot more to learn about ETF's. One more small project. It never ends :-)