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Exchange Traded Funds Experience Surge in Popularity

Caroline Maxwell, Investors Offshore.com

14 February 2001

Having nearly doubled in asset size in the year 2000, and nearly tripled the number of offerings available, ETFs (or tracker funds as they are known in Europe), look set to run and run, according to some.

Barclays Global Investors and State Street Global Advisors were the main UK players in this particular game in 2000, and are credited with raising public awareness of ETFs, having backed up each tracker fund rollout with tutorials, seminars, and millions in advertising dollars.

An ETF is basically a portfolio of index-traded securities which can be traded like stocks, meaning that shares can be traded long, short, or on margin, and investors can trade to their heart's content, as opposed to just once a day with traditional mutual funds.

In a recent move which seems to support the balance of opinion regarding these relatively recent investment vehicles (the first tracker fund was launched in 1993 by Amex to track the Standard and Poor's 500 index), Euronext and Amex announced that they would be setting up a joint venture to cross-list and trade US and European ETFs. This is a move that will undoubtedly be welcomed by investors on both sides of the Atlantic, as it will improve European access to funds traded on the American Stock Exchange, and vice versa.

As with every 'next big thing', though, investors are advised to be cautious. Although in general expenses are lower than for traditional index funds, ETFs may not be suitable for investors who deposit reasonably small amounts into funds periodically, as they will be charged a commission for each deposit.

However, Frank Stanton, an analyst with investment research firm Morningstar points out the possible advantages: 'For an investor making a lump sum investment, exchange traded funds can make good sense because they are low cost, and some of the more established ones…are more tax efficient than traditional index funds.'

Despite the fact that the long-term economic viability of these funds is as yet unknown, confidence still seems to be high, and if the trend continues, the Exchange Traded Fund looks set to become one of the rising stars of 2001. Watch this space…

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