Exchange Traded Funds

Past, Present and Future

First introduced in 1990 on the Toronto stock exchange and in 1993 on the American market, the exchange traded fund has increased in popularity from a little-known alternate to open-ended index funds to an investment industry in itself with over one hundred ETFs with assets of over one-quarter trillion dollars worldwide and almost $180 billion on the American stock exchange alone.

The exchange traded fund is an open-ended collective investment differing from standard mutual funds in quite a few ways. In similar fashion to that of investment companies, ETFs must be registered with the Securities and Exchange Commission as such. After creation of the ETF itself, the institutional investor deposits a block of securities within it; for the deposit, the institutional investor gets ETF shares which may in turn by traded on the stock exchange once listed in any national exchange.

As an investment, ETFs potentially promise the best of two worlds within stock market trading. ETFs offer the diversification and relative security inherent in an actively managed mutual fund while also allowing investors the freedom to buy and sell ETF shares just as he or she can buy and sell the stock of a publicly traded company. ETFs also feature a few distinctive advantages, with the typical ETF carrying low expense ratios, low turnover, and an advantageous tax structure.

Since the ETF is a relatively new phenomenon, and since so many ETFs are able to take advantage of technological advances and trends in e-commerce, innovations come fairly frequently to the market. On the other hand, the ETF market is notably stable, and the most widely held ETF is Standard & Poor's Depository Receipt (abbreviated SPDR and commonly known as "spiders"), a format with origins back to the very first ETF ever traded in the United States. Other ETFs are tied in with the Dow Jones Industrial Average or the Nasdaq 100 index; these are known as "diamonds" and "qubes," respectively. Funds known as "iShares" represent an ETF group created by Barclays Global Investors, the world's largest institutional investor.