Not long ago, exchange-traded funds (ETFs) were hardly ever considered as an investment option for retail investors. While many investors had heard of them, they were generally considered to be just another type of index fund.
Still, led by the popularity of the SPDR (aka, Spider), which is based on the S&P 500 stock index, ETFs grew to $610 billion in assets by May 2008. By then there were 680 ETFs for every index imaginable.
With last year’s introduction of actively managed ETFs, they are likely to become even more popular. There are already as many varieties of ETFs as there are of mutual funds and their numbers are growing rapidly.
ETFs, like mutual funds, are professionally managed and each fund represents an index or group of investments with specific characteristics in common. For example, the first and most famous ETF was the SPDR (aka, Spider), which is based on the S&P 500 stock index.
Like mutual funds, ETFs range from very low risk to very high risk investments. Unlike mutual funds, though, ETFs are priced continuously, not daily, and are traded on exchanges. ETFs also provide an opportunity for investors to gain exposure to alternative investments, adding diversification to their portfolio.
Because ETFs are traded like stocks and bonds, they provide the same level of trading flexibility and can be used for hedging strategies. They also are lower priced than most mutual funds and are more tax efficient, as there is little turnover in their portfolio securities and they don’t have to sell securities to meet investor redemptions. These advantages may fade somewhat as actively managed ETFs proliferate.
Overall, ETFs offer advantages over mutual funds and cost less – so what’s not to like?