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9/24/05 5:04 PM
Exchange Traded Funds: What's the (Big) Deal?
Exchange Traded Funds (ETFs) are on a roll: In early June, the American Stock
Exchange (AMEX) said it had created nine new industry-based Intellidex Indexes as
foundations for a new family of ETFs.
By the end of that month, Wheaton, Ill.-based PowerShares Capital Management
had already launched eight ETFs based on those indexes. Each index tracks 30 stocks
from target industries based on proprietary research designed to offer
market-beating investment returns.
At the AMEX, 24 funds have been introduced this year, compared to seven in all of
According to Morningstar, a Chicago-based provider of independent investment
research, 177 ETFs were listed as of August 31 with net assets of $255 billion,
compared to 143 funds with assets of $174 billon same period last year. In 2002,
there were only 97 funds with net assets of $89 billion.
"None of us envisioned this kind of growth," says Jim Ross, co-head of the advisor
strategy group at State Street Global Advisors (SSgA), a unit of Boston-based
processing bank State Street, one of the big ETF players. ETF growth is expected to
continue, he adds, with assets predicted to increase about 30% over the next few
years. Some in the industry have predicted that ETFs will grow at 30% annually for
the next five years, Ross adds. "I can see that happening."
Why are ETFs so popular? Because they provide certain benefits that their mutual
fund cousins do not. Like index-style mutual funds, ETFs are baskets of stocks
designed to provide diversification and to mirror the performance of an underlying
stock market index. When you buy a share of an ETF, you are buying shares in the
index. Unlike mutual funds, ETFs can be traded throughout the day and can be used
in short sales. They also offer some tax advantages over mutual funds.
And the annual expense ratios for ETFs are generally low - just 0.4% to 0.5%