A Brief History of ETFs: What Are They? | ETF Trends

Exchange traded funds (ETFs) have been in existence now for nearly two decades, but it’s only in recent years that they entered the mainstream. If you’re new to them, read our brief rundown on what they are, where they came from and why they’re better than mutual funds.

ETFs have changed the way millions of people invest and where they invest. Commodities, swaps and derivatives, for example, were once reserved for exclusive hedge funds and other institutional players. But now you – that’s right – you have access to these instruments, too.

Why They’re Better. ETFs are superior to active mutual funds for many reasons: they have lower fees on average, intraday liquidity, transparency and tax efficiency. And as we stated above, they allow average investors to play tricky markets like currencies and commodities from the comfort of their own homes. [Read Our ETF Education Articles.]

It All Began With a Spider. The introduction of an ETF that tracks the S&P 500, the SPDRs (NYSEArca: SPY) kicked off the industry. By the end of 2009, there were nearly 1,000 exchange traded products trading on U.S. exchanges, and even more than that around the world. It took mutual funds decades to get to this point. [Differences Between Mutual Funds and ETFs.]

Mutual Funds Aren’t Going Away. Don’t feel sorry for the mutual fund industry. It’s still massive and it still dwarfs the ETF industry. But mutual fund providers recognize the appeal of ETFs. That’s why they’re getting into the ETF business themselves.

How to Trade Them. You should have a simple strategy when investing in ETFs. Studies have repeatedly shown that the more complex a trading strategy is, the less likely an investor is to actually use it. A strategy we recommend is to look for funds that are above their 200-day moving average. There are always areas that are trending up as others are going down. [How to Follow Trends With ETFs.]

For more stories about ETFs, visit our ETF 101 category.

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.