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The Origin of ETFs

ETF stands for Exchange-Traded Fund, which is 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.

 

An ETF is a fund set up by a corporation or trust 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 can be bought and sold easily, and their value will change across the day.

 

ETFs first came into existence in May 1989 in the United States, and the first was called 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 ETFs. Investors showed a lot of interest, but Chicago courts ruled they were actually futures, and hence were only made available on futures exchanges.

 

The next iteration was done on the Toronto Stock Exchange in 1990 when they released the  Toronto 35 Index Participation Units (TIP 35). It was eventually joined by TIP 100 shares; the same idea for a broader index.

 

The success of these early ETFs 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. They are known as 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 ETF market in the US is over $3 trillion and growing. They are bigger than hedge funds and it is estimated that the ETF market will double in size by 2020.

 

This is constituted of more than 2000 ETFs 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.

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