An investment that is popular with large investors that resembles a mutual fund. Its objective is to achieve the same return as a particular market index. ETFs trade on stock exchanges. One well-known ETF is Spiders, or SPDRs, which invests in all the stocks included in the S&P 500 Composite Stock Price Index.
Although an ETF is legally called an open-end company or a kind of mutual fund called a unit investment trust, these terms are not interchangeable. ETFs don’t sell individual shares directly to investors and only issue their shares in large blocks of approximately 50,000 shares. These blocks are called creation units, which are frequently purchased by institutions. The creation units may be split up into individual shares and sold on a secondary market. An advantage to exchange-traded funds is that they can be sold short and bought on margins. They also allow traders to quickly buy or sell equities.
Although both closed-end funds and ETFs are investment companies whose shares trade in the open market, the shares are issued and redeemed differently. Closed-end funds issue a fixed number of shares in an initial public offering (IPO), and sometimes trade at a premium or discount to their net asset value (NAV) in the secondary market. ETFs allow their outstanding shares to increase or decrease but prevent a significant premium or discount from occurring to NAV. Closed-end funds are based on an actively managed portfolio of stocks; ETFs are based on index portfolios.
The American Stock Exchange (AMEX) was a pioneer in introducing ETFs, which have grown to $100 billion in assets in less than a decade. There are over 100 ETFs that trade on AMEX. In contrast, only three ETFs were listed on the New York Stock Exchange in early 2003. The iShares S&P Global 100 Index Fund (IOO) tracks the performance of the S&P Global 100 Index. It was the first ETF to be listed on the NYSE, in December 2000. Nearly two years later, two more ETFs were listed on the NYSE: the Fresco Dow Jones Euro STOXX 50 Fund (FEZ) and the Fresco Dow Jones STOXX 50 Fund (FEU).