Content area
Full Text
Special Issue on Exchange-Traded Funds
Edited by Peter Miu & Narat Charupat
1. Introduction
Over the past decade, exchange-traded funds (ETFs) have grown from a small, niche index-tracking product to become one of the most successful innovations in the history of investment. As of the end of 2011, the combined assets under management (AUM) of all ETFs traded on exchanges around the world were US$ 1.52 trillion, an increase of approximately 1,400 percent from the assets in 2001[1] . There are now close to 4,000 different ETFs listed on over 50 exchanges.
ETFs have a relatively short history. It is commonly acknowledged that the first ever ETF was the Toronto Stock Exchange Index Participations introduced in 1990 and designed to track the TSE-35 stock index. However, ETFs can trace their conceptual lineage to earlier "basket securities" products whose goal was to enable investors to trade a basket of securities in a cost-effective way. One example of such products is the Index Participation Shares, which came out in 1989 and whose untimely demise provided an incentive for exchanges to look for a replacement[2] . In 1993, the American Stock Exchange introduced trading on the Standard & Poor's Depositary Receipts (SPDR) whose aim was to track the S&P 500 index. In the years that followed, the SPDR proved to be a huge success and intensified investor demand for low-cost basket-trading vehicles.
In the 1990s, most ETFs were funds that tracked market-wide equity indices, sector indices and fixed-income indices. As the market for these ETFs became saturated, ETF providers (or sponsors) came up with products that were based on other asset classes such as commodities and currencies. Recent innovations (late 2000s) include ETFs that:
- hold physical commodities such as gold and silver;
- are actively managed, rather than passively tracking an index;
- employ leverage to generate returns that are a positive or negative multiple of the index returns; and
- combine a long position (in one index) with a short position (in another index).
The popularity of ETFs is due to their several benefits that distinguish them from other index-tracking products such as conventional mutual funds and closed-end funds. The major benefits are:
- intraday trading;
- tax efficiency;
- low expense ratios; and
- cost...