The exchange traded fund (ETF) was born in 1993. It provides investors the perfect blend of a stock and a mutual fund. Overall, they help control portfolio costs, and add efficiency plus diversification. The momentum of the ETF has flourished due to their bonuses like trading flexibility, and cost structure and transparency, reports Cathy Pareto for Investopedia.

State Street was the first on the scene in 1993, January 29 to be exact. In partnership with the American Stock Exchange they launched the first ETF in the U.S., the SPDR 500 (SPY). The success was taken well, and other companies followed with their versions, such as the Dow Diamonds (DIA) and the PowerShares QQQ (QQQQ).

Exponential growth was just around the corner, there are now assets totaling $623 billion, with nearly 700 ETFs available from about 25 providers. It is estimated that by 2010 assets will be at $1 trillion. SPY has remained dominant, with total assets at $75 billion.

Some of the major trends pushing ETFs success:

  • Academic Ties- Theories born in academia and once only heard of in the ivory towers are being applied to modern portfolio theory.
  • Market Demand- Individual investors make up about half of all ETF assets. An investment tool once used only by sophisticates to hedge, tax-loss harvest and transition management has broken into the mainstream.
  • Market Shift- The shift from institutional to individual investor is due to two trends- the widespread use of the internet, and the transition from commission-based financial advisors to fee-only financial advisors.
  • Asset Class Availability- ETFs opened doors for investors to access commodities, currencies, and metals, areas institutional investors could only use. Investors can buy shares of an entire index or a sub-set of the index. The possibilities are amazing.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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