The paper 'Exchange-Traded Funds' a great example of a Macro and Microeconomics Case Study. The popularity of Exchange-Traded Funds has increased greatly in the contemporary world as investors become increasingly savvy; mostly due to their low costs. ETFs are said to offer great investment opportunities due to their ease of diversification, tax efficiency, and low expense ratios among other factors. All this is possible while maintaining ordinary stock features such as short selling, limit orders, and options. ETFs also allow for flexibility because there are no limits to what one should invest.
Being economically easy to acquire, hold, and dispose of, they are useful in market timing investment strategies. ETFs however have their limitations in that they tend to be highly volatile and they may attract high trading commissions especially where there is a need to keep selling and buying, as in the case of leveraged ETFs. There are also dangers of market deviations and tracking errors that may affect ETFs. The choice on whether to invest in ETFs however lies with the investor and this may be assured through a comprehensive understanding of what ETFs entail.
This paper seeks to explore the subject of exchange-traded funds; with the aim of establishing whether they are effective investment options to consider. Exchange-Traded Funds (ETFs) The exchange-traded funds are investment funds that are traded on stock exchanges, just like stocks. The ETFs are known to hold assets such as commodities, stocks, or bonds. They trade close to their net asset value. It is possible to buy and sell ETFs throughout a trading day when the stock exchanges are open. The origin of exchange-traded funds dates back to 1989.
The first exchange-traded funds happened due to the market crash of 1987 (Jim et al. 2002, p. 127). The origin of ETFs The origin of ETFs is rooted in the Index Participation Shares that were traded on the American and Philadelphia Stock Exchange. This product however did not last long because the Chicago Mercantile exchange succeeded in discontinuing sales in the USA. After this Toronto Index participation shares started to trade a similar product on the Toronto Stock Exchange in the year 1990. The product proved to be very popular, thus attracting the United States to try the same trade and product (Richard & Don 2009).
The American Stock Exchange embarked on trying to develop a product that would satisfy the Security Exchange Commission regulations in the USA in order to benefit from the promising trade (Gastineau 2002, p. 32). In 1993, the Standard & Poor's Depositary Receipts which were designed and developed by the exchange executives Steven Bloom and Nathan Most were introduced to the market (Carrel 2008, p. 14). The fund which was commonly known as SPDRs or ‘ spiders’ , developed to become the world’ s largest ETF.
Another ETF was introduced in May 1995 and was known as MidCap SPDRs. Soon after, a series of ETFs were developed, including Barclays plc’ s WEBS (World Equity Benchmark Shares) in 1996. WEBS was an innovative ETF as it gave easy access to foreign markets. WEBS were set out as a mutual fund as opposed to SPDRS which were in the form of unit investment trusts. Sector Spiders were introduced in 1998 by State Street Global Advisors. These were followed by others such as Dow Diamonds in 1998, Cubes in 1999, and iShares in early 2000 (Wiandt and McClatchy, 2002, p.
82). Barclays Global Investors played a significant role in the development of ETFs because in the year 2000, Barclays put a strong emphasis on education as well as ETF distribution in order to ensure that the investment alternative reached the long-term investors. Barclays’ iShares surpassed the asset of all the ETF competitors in Europe and the U. S within 5 years. With the sale of Barclays to BlackRock and the entry of Vanguard Group into the ETF market, increased proliferation of the ETFs market has been witnessed.
The Investment Company Institute website notes that by September 2010, 916 ETFs existed in the United States; with assets worth $882 billion.
Carrel, L 2008, ETFs for the Long Run, John Wiley & Sons, New York.
Christopher, FT 2011, EFT short-selling controversy rumbles on, Viewed April 29, 2011, http://discussions.ft.com/alchemy/forums/etfcentral/etf-short-selling-controversy-rumbles-on
Dellva, W 2001, Exchange-Traded Funds not for everyone, Journal of Financial Planning, 14(4), 110-124.
Devcic, J 2011, Focus With Exchange-Traded Grantor Trusts, Viewed April 30, 2011, http://www.investopedia.com/articles/exchangetradedfunds/09/exchange-traded-grantor-funds.asp
Fuller, SL 2008, The Evolution of Actively Managed Exchange-Traded Funds, Review of Securities & Commodities Regulation, 41 (8).
Gastineau, G 2002, The Exchange-Traded Funds Manual. John Wiley and Sons, New York, NY.
Index F, Jim, W & Will, M 2002, Exchange Traded Funds, John Wiley and Sons, New York, NY.
Investment Company Institute website www.ici.org
Investopedia 2011, Bond ETFs: A viable alternative, Viewed April 29, 2011, http://www.investopedia.com/articles/bonds/05/011105.asp?viewed=1
Kennedy, M 2011, Five Reasons an ETF May Not Be Right for You, Viewed April 30, 2011, http://etf.about.com/od/riskofetfs/tp/Five_ETF_Dsvntgs.htm
Laurence,M, Neal,W & Andrew, S 2008, ETF Strategies and Tactics: Hedge Your Portfolio in a Changing Market, McGraw-Hill Professional, New York.
Richard, A & Don, P 2009, The ETF Book: All You Need to Know About Exchange-Traded Funds, John Wiley and Sons, New York.
Salisbury, I 2009, ETFs were wider off the mark in 2009, Viewed April 29, 2011, http://online.wsj.com/article/NA_WSJ_PUB:SB10001424052748704269004575073850786749116.html
Securities and Exchange Commission (SEC) 2001, SEC Concept Release: Actively Managed Exchange-Traded Funds, Viewed April 30, 2011, http://www.sec.gov/rules/concept/ic-25258.htm
SEC 2008, 17 CFR Parts 239, 270, and 274
Seekingalpha, 2007, The case against leveraged ETFs, Viewed April 30, 2011 http://seekingalpha.com/article/35789-the-case-against-leveraged-etfs
Spence, J 2004, Gold ETF rakes in $550 mln in debut, Viewed April 30, 2011 http://www.marketwatch.com/story/buyers-pile-into-first-gold-etf-offering
Wang, Z 2011, Market Efficiency of Leveraged ETFs, Viewed April 28, 2011, http://olympiainv.com/Memos/ETFs.pdf
Wiandt, J & McClatchy, W 2002, Exchange Traded Funds, John Wiley and Sons, New York, NY.
Exchange-Traded Funds; Proposed Rule, Viewed April 29, 2011, http://www.sec.gov/rules/proposed/2008/33-8901fr.pdf
Maeda, M 2008, The Complete Guide to Investing in Exchange Traded Funds: How to Earn High Rates of Return – Safely, Atlantic Publishing Company, London.