ETF stands for Exchange-Traded Fund, which is a popular investment vehicle. This, however, has not always been the case. In fact, ETFs are one of the newest ways people have found to put their money in the market.
Corporations and trusts set up Exchange-Traded Funds to hold a portfolio of assets. These assets are often stocks but can also be commodities or bonds. This makes them structurally similar to mutual funds, with the added component of also being tradable on a stock exchange. This means that they are easy to buy and sell, and their value will change across the day.
The Origin of Exchange-Traded Funds
ETFs first came into existence in May 1989 in the United States. The first one went by the name of Index Participation Shares. This first ETF was a fund that tracked the Standard & Poor’s index of the largest 500 publicly traded companies. Known as the S&P 500, this is still a key index for Exchange-Traded Funds. Investors at the time found it intriguing. However, Chicago courts ruled they were actually futures.Hence they were only available on futures exchanges.
The next iteration was on the Toronto Stock Exchange in 1990. They released the Toronto 35 Index Participation Units (TIP 35). It eventually expanded with the addition of the TIP 100 shares. It was the same idea for a broader index.
The success of these early Exchange-Traded Funds in Canada spurred on American investment experts to try to introduce ETFs again. This led to the introduction of S&P Depositary Receipts in 1993. Traders sometimes also call them the SPDRs or Spiders. They still exist today and enjoy continued popularity.
Since its inception, the popularity of the ETF market has been climbing steadily. The current size of the Exchange-Traded Fund market in the US is over $3 trillion and growing. They are more popular than hedge funds, and some estimate that the ETF market will double in size by 2020.
This is constituted by more than 2000 Exchange-Traded Funds in the market. The largest class of ETFs by far is Equity ETFs, with around 70% of the market share. Behind them are Fixed Income ETFs at 16% and Commodity ETFs at 6%. Other ETFs are small in market share, such as Currency ETFs, making up 2% of the ETF market.