Exchange-traded funds: A primer

Essentially index funds that are listed and trade on exchanges like stocks, Exchange-traded Funds (ETFs) have opened a whole new panorama of investment opportunities to both individual investors and institutional money managers. At $56.3bn as of 31st October, ETF assets have soared from just $1.1bn in 1995. They account for about 12 per cent of all index mutual fund assets in the US and, according to a recent study by Financial Research Corporation, ETF assets are expected to roughly quadruple to $201bn and account for 27 per cent of index mutual fund assets in the US in five years' time. ETFs account for over two-thirds of the daily trading volume on the American Stock Exchange. Most days, two or three ETFs are on the list of the top five most actively traded stocks on the AMEX. Characteristics of ETFs make them a viable alternative to trading futures and baskets of stocks for investors looking to increase or reduce their exposure to countries, sectors, industries and styles. ETFs allow investors the flexibility to use them for numerous applications, which can be appealing to both individual and institutional investors.