Winning Edge Trading: Successful and Profitable Short- and Long-Term Trading Systems and Strategies

CHAPTER 5

The Exchange-Traded Funds Market

The Philadelphia Stock Exchange was the birthplace of the first U.S. ETF, in 1989. Europe made ETFs available in 1999. Originally seen as traditional index funds, a cluster of traded securities tracking a sector, the concept of the ETF evolved by 2008, when the SEC authorized the creation of actively managed ETFs.

In recent years, according to the Investment Company Institute (ICI), ETFs have become more customized, tailored to an increasingly specific array of regions, sectors, commodities, bonds, futures, and other asset classes. As of April 2008, the United States had a total of 660 ETFs, representing about $596 billion in assets—a $129.41 billion increase over the previous 12 months.¹

CHARACTERISTICS OF ETFs

Since the inception of the first ETF, SPDR by State Street Global Advisors, in 1993, ETFs have continued to gain popularity and attract assets at a rapid pace. The contributing factors in ETFs’ popularity are their low associated costs and expenses, flexibility, and tax efficiency. These great benefits have made ETFs one of the favorite new kids on the investment block and quite popular. Let’s review each of the ETF’s features, starting with using them as a single security stock to trade a basket of various market sectors.

Trading Market Basket or Index with One Stock

ETF is like a mutual fund that comprises many possible stocks but trades like a single stock. This enables you to hold different market indexes as just one ...