Exchange traded funds (ETFs) first came to the public in 1993 in an effort to transform the typical, everyday monotony of the mutual fund.

And the ETF came to us in a perfectly bundled basket of stocks, ready to trade throughout the day as a single stock, while offering the diversification that owning multiple securities would. Add to this transparency, tax-efficiency and even a path away from the traditional cap-weighted approach, and so goes the ETF boom.

The first most popular ETF is the SPDRs (SPY), which tracks the S&P 500. Through the close of last month, it had cranked out a cumulative return of roughly 197%, reports Shannon Zimmerman for The Motley Fool.

Other great performance points that ETFs have brought to the table:

  • leveraged funds, which can return two times the daily return of the underlying benchmark
  • shorting the market with short and ultra short ETFs
  • access to hard-to-reach areas of the market such as currency and commodities
  • fundamentally weighted indexes

No doubt, the ETF boom has been a boon to individual investors, and the diversification that an ETF brings to a portfolio is invaluable. As people look to diversified areas, ETFs will be a popular investment tool, due to the transparency and unsurpassed diversification.

The pause of growth in the industry also reflects the bear market and potential recession, not just that some products aren’t working. Investors with cash on the sidelines will be going to ETFs when it’s time.

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.