A Brief History of Exchange Traded Funds

First introduced on the Toronto stock exchange in 1990 and on the American market in 1993, the exchange traded fund has gone from a little-known alternate to open-ended index funds to a full-on investment industry with more than 100 ETFs representing assets of US $250,000,000,000- (or US $250 billion-) plus; more than 70% of this is on the American stock exchange.

The exchange traded fund (ETF) is an open-ended collective investment evolved from, but far different than, standard mutual funds. Like investment companies, ETFs must be registered with the Securities and Exchange Commission as a company. After creation of the ETF, the institutional investor deposits a block of securities; in exchange, the institutional investor gets ETF shares which may be traded on the stock exchange.

As an investment, ETFs potentially promise two plusses in stock market trading. ETFs offer the diversification and relative security inherent in a traditional mutual fund while allowing investors the freedom to buy and sell ETF shares just as in a publicly traded company. ETFs also typically carry low expense ratios, low turnover, and an advantageous tax structure.

As the ETF is a relatively new scheme and ETFs are therefore able to cash in on technological advances and e-commerce trends, innovations within the market appear frequently. In seeming contradiction, the ETF market is surprisingly stable: The most widely held ETF is Standard & Poor's Depository Receipt, essentially the very first ETF traded in America. Other common ETFs are set to the Nasdaq 100 index (these ETFs are dubbed "qubes") or the Dow Jones Industrial Average ("diamonds"). "iShares" are an ETF group created by investment giant Barclays Global Investors.

Asset reportage for 2005 shows the top ten US ETFs to be:

•the iShares Russell 2000 Index Fund; the iShares Standard & Poor's 500 Index Fund;
•the iShares MSCI Emerging Markets Index Fund; the iShares MSCI Japan Index Fund;
•the iShares MSCI EAFE Index Fund;
•the iShares Dow Jones Select Dividend Index Fund;
•the DIAMONDS Trust (Series 1);
•MidCap Standard & Poor's Depository Receipt (commonly known as "SPDRs");
•other SPDRs;
•Qubes;
•State Street Corporation's streetTRACKS; and
•the Vanguard Group's VIPERS.

Should ETFs retain their current level of popularity, the sky is the proverbial limit. Following the release of the first SPDR ETFs based on the international exchange and the Midcap index arrived. International exchange ETFs have existed since 1996, when there were 17. In 2000, assets of the eighty-plus extant ETFs were just under US $83 billion; by 2004, 180 funds (with another 170 having come and gone) represented over US $230 billion in 28 markets. Though rates of 32-34 percent annually, as in 2003 and 2004, on an ETF investment are unlikely for much longer, ETF investment still seems a decent one in the medium-term.