| What is an exchange-traded fund (ETF)? | | | | Dow Jones Industrial Average (DIAMONDS Trust |
| An ETF Investment is an exchange-traded fund, a | | | | Series 1 ("Diamonds"), and the NASDAQ |
| type of investment vehicle traded on stock | | | | (NASDAQ 100 Index Tracking Stock ("Cubes") |
| exchanges. ETF stocks are traded like single | | | | followed in 1998 and 1999 respectively..) |
| shares, with the prices moving throughout the | | | | As such, ETF's have to date been mainly what |
| day. | | | | might be called "index funds" which track entire |
| An ETF typically holds assets such as stocks | | | | indexes (as above). While, during their short |
| (typically a mixture of investments in unit trusts | | | | history to date, ETFs have traditionally been the |
| and investment trusts) or bonds. Many ETFs in | | | | domain of large and/or offshore investors, with |
| fact track an overall index, such as the S&P | | | | private investors reluctant to trade in them, this |
| 500 or MSCI EAFE. An ETF's overall value is | | | | trend is changing. Now private investors account |
| usually around the same price as the net value of | | | | for approximately 40 percent of ETF trades in |
| the asset value of its underlying assets; if it is | | | | the US, a proportion that seems set to rise. One |
| tracking an overall index, its value typically moves | | | | reason that private investors have become more |
| in line with changes in that index. Only "authorized | | | | interested in ETFs is that they provide access to |
| participants" (typically large investors) are actually | | | | funds that track assets and sectors that were |
| permitted to deal directly with the ETF in terms | | | | previously only available to larger investors. |
| of buying or selling shares from or to the fund | | | | Types of ETF Investments available |
| manager. Such transactions usually involve the | | | | Since their initial launch, a number of different |
| purchase or sale of "creation units" (i.e. groups of | | | | types of ETF have developed in the market place. |
| tens of thousands of ETF shares. Individual | | | | These include Open-end index funds (products |
| investors then go through these "authorised | | | | include iShares, Select Sector SPDRs, |
| participants" to buy ETF stocks and to formulate | | | | PowerShares, Vanguard, and WisdomTree), Unit |
| their ETF trading strategies. | | | | Investment Trusts (UITs) (products include |
| How long have ETFs been around? | | | | BLDRs, Diamonds, SPDRs, and PowerShares QQQ |
| ETF's are a comparatively recent product, having | | | | Trust ), Grantor Trusts (products include |
| been available in the US only since 1993. In 1992, | | | | Currency Shares, streetTRACKS Gold Shares, |
| the American Stock Exchange (AMEX) made use | | | | iShares Silver Trust, and Merrill Lynch HOLDRs), |
| of the SEC's "SuperTrust Order" to request use | | | | Exchange-traded Notes (ETNs) (products include |
| of the first authorized ETF. The SEC approved | | | | iPath ETNs, ELEMENTS ETNs) and Partnerships |
| that petition, and granted the SPDR Order in | | | | (products include U.S. Oil). (Source: EFTGuide.com). |
| October, 1992, enabling the AMEX to | | | | In 2003 assets held by ETFs in the US alone |
| subsequently list the S&P Depositary | | | | exceeded US$155 Billion. |
| Receipts, Trust Series 1 (aka "Spider") (which was | | | | To understand whether ETF investment is suitable |
| benchmarked to the Standard & Poors' 500 | | | | for you and in choosing which particular vehicle to |
| Index) the following year. ETFs came to Europe a | | | | include in your portfolio, it is imperative that you |
| few years later, in 1999. (In the US, in addition to | | | | understand, among other things, its advantages |
| "Spiders", new ETFs followed benchmarks like the | | | | and disadvantages. |