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

CHAPTER 7

The New Indexers

The ETF hit adolescence a little early.

Ten years after its birth, as it found wider acceptance in the marketplace, the ETF’s second phase began. Just like an adolescent, ETFs experienced a phenomenal growth spurt. From the end of 2003 through 2006, the number of funds tripled to 359, according to the Investment Company Institute (ICI), with assets under management surging nearly as much: 180 percent. The ICI is the trade association for the mutual fund, closed-end fund, UIT, and ETF industries. In 2007 alone, the ICI said the industry nearly doubled, adding 270 new funds, a 75 percent increase, for a total of 629 funds.¹ Including exchange-traded products not regulated by the ’40 Act, there were 657, according to Lipper, a fund research firm. And not unlike a typical teenager, most of the companies that sprouted during this second wave were creative, original, wacky, loud, blindly courageous, and given to calling their elders out-of-touch.

During the ETF’s first decade, the product and its issuers were like children. They were learning to walk, get a feel for how the product worked, and trying to see where it fit into the world. During the 1990s, the industry took baby steps toward each major index. It started with the king, the S&P 500. It took two years before it built the second ETF, the S&P MidCap 400. Two more years to bring the Dow Jones Industrial Average into the fold, then it was another two years before the NASDAQ-100 Index joined the party. ...