Exchange Traded Funds

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.

In terms of assets at the conclusion of year 2005, the list of top-ranked American ETFs includes the DIAMONDS Trust (Series 1), the iShares Dow Jones Select Dividend Index Fund, the iShares MSCI EAFE Index Fund, the iShares MSCI Emerging Markets Index Fund, the iShares MSCI Japan Index Fund, the iShares Russell 2000 Index Fund, the iShares Standard & Poor's 500 Index Fund, MidCap SPDRs, Qubes, SPDRs, State Street Corporation's streetTRACKS, and the Vanguard Group's VIPERS.

As for the future, should ETFs retain their current level of popularity, the sky is the limit. Following the creation and release of the SPDR concept came ETFs based on the Midcap index and international exchange; the latter represented seventeen ETFs as far back as 1996. At the end of year 2000, assets of the fewer than ninety ETFs were calculated at approximately $83 billion; a mere four years later, those figures had increased to almost 180 funds (and 350 funds in the history of the investment) representing more than $230 billion on twenty-eight markets. Though we surely cannot expect an ETF investment to continue to grow at rates of 32-34 percent annually, as in 2003 and 2004, but with the continued innovation so characteristic of the ETF market, an ETF investment appears to be a secure one in at least the medium-term.


Part one. The history of ETFs

Though the concept of modern exchange traded funds quite clearly began in Toronto in 1989, its origins go back to 1976 and the creation of the index fund. At that time, John C. Bogle of the Vanguard Group conducted a study which showed that seventy-five percent of existing mutual funds earned as much as or less than the Standard & Poor 500 stock market index. If a mutual fund could be created that invested in all S&P 500, it automatically would be an improvement over the standard mutual fund of that time. The result was the Vanguard 500, a structure that theoretically is primarily concerned with shareholder interests, as opposed to mutual funds, which attempt to serve the interests of both outside owners and shareholders.
The ETF is a natural outgrowth of the index fund in its nature as an open-ended collective investment, with a subsequent few adjustments made thanks to modern exchange dynamics. Like
mutual funds and index funds, ETFs must be registered as an investment company with the Securities and Exchange Commission. 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 in index funds, investors are dealing with blocks of stocks in an attempt to regulate the stock market index; this reduces risk via the anchoring influence of blue chips while taking advantage of boom-time economies. However, ETFs can also be based in a market sector or even a commodity. Unlike mutual funds, individual shares within ETFs and index funds are not redeemable in part.

Recently added to ETF investment schemes is exemptive relief in the U.S. This allows their registration as mutual funds despite their status as not individually redeemable, it permits the trading of shares in kind, and share prices are pre-negotiated. This latter advantage refers to the intraday trading of ETFs and the market-determined prices can protect investors from a day's worth of dramatically fluctuating trade; this feature is unique to ETFs, as is the requirement that ETF trading is done intraday only.

Since its introduction to the Canadian market in 1990 and the American market in 1993, the exchange traded fund has increased in popularity from a little-known alternate to open-ended index funds to an investment industry in itself. The Toronto Stock Exchange introduced the first ETF, known as TIPS, in January 1990. Under the auspices of the SEC's Super Trust Order, American Stock Exchange interests put in a federal-level request to create an independent index-based ETF.

After a bit of wrangling and hashing out of details with the SEC and American federal law (including incorporation the Securities Act of 1933 and the Securities Exchange Act of 1940, which regulate mutual funds and, since the 1970s, any similar such investment instrument e.g. index funds), January 1993 saw the opening of the first ETF in the U.S. Based on the Standard & Poor 500 index, the S&P Depository Receipts Trust Series wasn't followed up until 1995, when a new ETF tied into the S&P MidCap 400 index was added.

will be continue..... late.....