History of Exchange Traded Funds
The first assets that were traded as exchange traded funds (ETFs) first appeared on the horizon sometime in 1989 with the listing of the TIP 35, the Toronto Index Participation Fund. This fund was created as a way for investors to trade 35 of the largest stocks in Canada. Some authorities have argued that the Toronto Index Participation fund did not satisfy the requirements of a true ETF, and point instead to the Standard & Poor’s 500 Index Depository Receipts (SPDR or colloquially called ‘spider’), listed in 1993, as the first authentic exchange traded fund to be made available to investors. The S&P500 Depository Receipt was an exchange traded fund that was created to track the S&P500 index as the constituent asset. The SPDR still trades today under the SPY ticker symbol, with assets of more than $58billion, making it the largest single ETF in the world.
From the humble beginnings of the ETF industry, the next decade witnessed a slow start as investors were a bit slow to jump in on the ETF train. Back then, individual investors were totally locked out of ETF trading, which was the exclusive reserve of the large hedge funds and other categories of institutional traders. By 1999, the Tracker Fund of Hong Kong (TraHK) made its debut on the Asian market as the government of Hong Kong sought to dispose of its holdings of Hong Kong shares it had acquired a year earlier in a market action as a response to the Asian currency crisis. The TraHK was designed to track the performance of the Hang Seng stock index.
The onset of the new millennium brought about a lot of positive changes to the exchange traded fund market. New technology that enabled direct market access for individual investors to buy and sell securities online irrespective of geographical location had been developed, and internet usage had spread across the world. With a sudden increase in the potential market for this new type of financial derivative, more exchange traded funds were launched. The Euro Stoxx 50 ETF (tracking the Euro STOXX stock market) was launched in 2001, and by 2002, close to 250 different exchange traded funds had been launched and were operational globally. By the end of the 2000s, close to 1000 ETFs were operational. As at the end of 2011, the number of operational ETFs in the world was about 1,134, with total asset base of $1,048billion according to the Investment Company Institute 2012 Factbook.
There is no doubt, that ETFs have come a long way from its humble beginnings about 23 years ago, to take the global financial marketplace by storm. The demand for ETFs is steadily growing as institutional investors deploy them more for the purpose of hedging against risk and participating in identified bull markets wherever they may be. ETF investments now account for close to 10% of all global investments by major financial firms. That is how important ETFs have become.
ETFs: Future Trends
What does the future hold for exchange traded funds? ETF investments are expected to experience a steady increase in the next decade. As they become more accessible to individual investors and find new meaning to institutional investors looking for ways to expand their revenue base in an attempt to outperform the underperforming indexes and stock markets, it is expected that the investment into the ETF sector will not just increase, but show some growth trends. Greater individual participation is expected, and this is expected to mirror the growth in the forex market that was driven by the deregulation policy that encouraged individual participation.
Presently, more investment is being seen in global/international ETFs as well as bond ETFs, as these have been identified as the areas where ETF investment would be most profitable.
One thing is clear. Exchange Traded Funds have emerged as the next big thing in the global investment climate, and if you are still dilly-dallying and hanging on to the traditional methods of investing that you are used to, it may be time for you to add something new to the mix. Consider adding ETFs to your portfolio. There are still many countries where ETF investing is yet to catch on, so you can still position yourself to capture a bull market anywhere on the globe with a stake in an exchange traded fund.