When first launched, Exchange Traded Funds (ETFs), were simple tracker funds based on major commercial indices, such as the S&P 500 or the FTSE 100. Their main advantages were that they traded in real-time on a recognised stock exchange, attracted low annual management fees and total expense ratios (TERs). For the investor looking to 'buy the market' this was an obvious attraction, as the low charges and small tracking errors simply improved the returns to investors. The ability to trade real-time, rather than at a fixed point in the day also offered more flexibility. Indeed, the NASDAQ 100 ETF, the QQQQ, now attracts the most volume of any traded share and the S&P 500 ETF is the largest mutual fund in the world.

 

As demond grew for ETFs the issuers began to diversify their offerings to the market. Working in conjunction with the index providers, such as Dow Jones, and investors, they began to issue highly targetted ETFs such as those based on specific industry sectors, dividends or property.

 

With the mechanism for execution and mangement well established, new entrants seized the opportunity to use the structure to introduce ETFs based around other asset classes, such as commodities, short exposure and gearing. The next step is envisaged to be the issuing of quasi-active managed ETFs but it remains to be seen whether this next step is acheivable. Regardless, the current available range of ETFs means that active index managers, such as iFunds, have an enormous tool set to work with to provide diversified sources of returns with a quantative risk management overlay.

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