What are exchangetradedfunds

WHAT ARE ETFs?

Exchange traded funds (ETFs) are simply actively or passively managed funds that are listed on an exchange and trade like shares of stocks. ETFs should not be confused with closed-end funds, traditional mutual funds/ unit investment trusts, or derivative instruments. ETFs are a relatively new type of security that have become increasingly popular over the past 3 years since they offer many of the advantages of both mutual funds and shares of stocks. ETFs are one of the most rapidly growing areas in the investment fund industry worldwide. In fact, according to James Pacetti of ETF International (www.etfinternational.com), “ETFs represent the most significant innovation in the mutual fund industry since the introduction of money market funds in 1972 in the US.” ETFs are expected to increasingly capture new investment flows from individual investors, financial advisors, and large institutional managers.

The most extensive markets for ETFs are in Europe, Japan, Hong Kong and North America. As of October 2002, there are 274 ETFs listed on exchanges around the world. Some of the most popular ETFs are known are the “Spiders”, “the Qubes or Qs,” “Diamonds”, “iShares or iUnits,” “IndExchange trackers” “LDRS (Listed Diversified Return Securities pronounced LEADERS) , MasterShares and Fresco Index Shares”. Each month, more exchanges introduce ETFs as despite the downturn in equity markets, ETFs continue to increase in trading volume and assets under management. Increasingly, ETFs are cross-listed across countries. Europe has the most extensive cross-listed ETF marketplace followed by Singapore (SGX). According to Morgan Stanley, there are 116 ETF listed in Europe with approximately 183 cross-listed. In the US, while ETFs are not formally cross-listed as in Europe, many are traded across exchanges under unlisted trading privileges provisions. The American Stock Exchange, the New York Stock Exchange and Archipalego have extensive ETF trading sections and firms making markets in ETFs. The Chicago Board of Options and NASDAQ also list and trade ETFs.

These products are not to be confused with Exchange Traded Baskets (ETBs) which are “grantor trusts”. ETBs are currently branded by Merrill Lynch as HOLDRs (pronounced “holders”). There are currently 17 HOLDRs listed in the US on the American Stock Exchange.

The chart below shows how indexed-based ETFs (IB-ETFs) are a fast growing part of the investment management industry.

Both retail and institutional investors invest and trade ETFs. Indexed-Based Equity and Fixed Income ETFs (IB and FI-ETFs) are the most common and popular ETFs. DWS has sponsored actively managed ETFs in Germany. Enhanced indexed ETFs will soon be introduced in the US market.

Why are ETFs so popular? ETFs are an attractive alternative replacing to mutual funds and closed-end funds as investment vehicles because they offer superior product architecture and value. ETFs offer the ability to be traded real-time like a stock, marginability, accessibility to investors with brokerage accounts and the transparency of the investment instrument. ETFs can also be more tax efficient and cost efficient compared to a traditional mutual fund. ETFs offer investors and financial advisors more control over their investment funds. See the table below to compare features of ETFs to other popular investment vehicles:

Many brokerage firms offer ETF research. The most extensive research can be found at A.G Edwards, Credit Suisse, Deutsche Bank, Goldman Sachs, Lehman Brothers, Morgan Stanley, Merrill Lynch, Raymond James, Salomon Smith Barney. Morgan Stanley publishes the most comprehensive ETF data and research. For more information, check our research area. Exchanges with ETF listings and ETF sponsors also have extensive descriptive and statistical information on ETFs available on their web sites.

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