ETFs from Evolution to Revolution

Exchange-traded funds (ETFs) have emerged from their fledgling beginnings in 1993 to a full-blown revolution in the mutual fund industry. The number of ETF offerings increase by the hundreds each year. ETFs available for investment rose more than tenfold between December 2003 and December 2008, from 71 to 747, including a 221-fund increase in 2008, during a brutal bear market. It is not possible to predict when the growth will slow. New ways of using ETFs in portfolios as well as product innovation will ensure a robust new issue market going forward for many years. There are reasons to believe that the total number of ETFs will double or triple again before any slowdown occurs.

There are many different types of exchange-traded products including exchange-traded funds (ETFs), exchange-traded notes (ETNs), grantor trusts, and unit investment trusts (UITs). Chapter 3 has a detailed discussion on these types and others. For convenience, all exchange-traded products in this book are referred to as ETFs unless otherwise indicated.

The best place to begin a study of ETFs is at the beginning. This chapter highlights the events that led to the creation of ETFs and how the marketplace has evolved over the decades. The chapter takes us to a point in the evolution where we are today and looks at where the industry is likely to go in the future.

ETFs Are a Growth Industry

There was only one ETF on the market at the end of 1993, and it had assets ...

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