ETFs for the Long Run: What They Are, How They Work, and Simple Strategies for Successful Long-Term Investing

CHAPTER 1

ETFs—The Newfangled Mutual Funds

Diamonds and Spiders and Cubes, oh my.

Upon reading such things in the financial press, individual investors familiar with stocks and bonds can’t be blamed for wondering if some weird menagerie was let loose upon Wall Street. When names like iShares and PowerShares float by in articles and ads, investors may think that typical shares of company stock have undergone some strange mutation into bigger and better shares. And, in a manner of speaking, they would be right.

All of these are brand names for an investment vehicle known as the exchange-traded fund (ETF), one of the hottest products on Wall Street. At the end of 2006, there were 359 exchange-traded funds. In 2007, 270 new ETFs were launched, increasing the industry by 75 percent for a year-end total of 629. Over that same time, the industry’s assets under management surged 44 percent to $608.4 billion.

Despite their phenomenal growth and the fact that ETFs have been on the market for 15 years, many investors still are not aware of them. Ask the average person on the street what an ETF is and you will get answers such as the electronic transfer of funds, an enriched text format for computer documents, or the president’s energy task force.

While these terms all share the same initials, you can be sure that whenever someone you know is excited about ETFs, they’re talking about exchange-traded funds. A simple way to understand the acronym is to recall that it refers to newfangled mutual ...