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December 1, 2002

Getting Saved on Wall Street: ETFs: A New Religion Is Ten-Years Old

By Nina Mehta

Also in this article

  • Getting Saved on Wall Street: ETFs: A New Religion Is Ten-Years Old

Ten years ago few investors in the equity markets had heard of them and even fewer had actually used them

Today exchange traded funds are one of the hard to find winners in a bear market. Indeed, the exchange traded fund is one of the few equity classes that is still taking in new money.

There's a good reason for that cash flow. Spiders (SPDR), the Standard and Poor's 500 Index that was created ten years ago to track the ETF performance, is pummeling the beaten down broad based indexes. Those professionals who trade these once little known investments have much to celebrate. ETFs have become so popular that more new indexes have been created in this decade of growth. These include Midcap SPDRs, iShares, Diamonds and QQQs.

The Qubes are now among the most popular stocks in the world. The TIPS, traded on the Toronto Stock Exchange since 1990 as well as Merrill Lynch's popular industry-based HOLDRS, are also on the list of innovative pooled investment vehicles that are driving ahead even in bear market. And fund sponsors are still stepping on the gas.

Barclays Global Investors, which brought the trading public the iShares family of products, seems to introduce a new fund every time Starbucks sells a double latte. There are now close to 300 ETFs worldwide. A third of them are in the United States and another third are in Europe. In the U.S., ETFs had more than $82 billion in assets under management at the end of September.

After a 10-year track record, the ETF industry is finally beginning to whip up interest among a wider group of participants. A conference in November in New York City, about ETF strategies and applications, showed how fast the industry is advancing.

Twelve months ago, the same conference, which was sponsored by the Strategic Research Institute, would not have been possible, according to Tom Jardine, head of ETF trading at Deutsche Bank Securities. Investors who traded ETFs didn't have strategies. Investors were either hedgers or speculators. Now, investors have at their fingertips a plethora of ETFs that allow them to slice and dice the equity markets. ETFs are the only investment portfolios that can be customized to meet an investor's specific needs, some ETF pros say.

Most significantly, ETFs have successfully staked out the fixed-income territory. BGI launched four fixed-income ETFs in July. Three are based on the benchmark Lehman Brothers bond index and the fourth on GS $ InvesTop Index of 100 corporate bonds. All but one of them are a success.

Net Assets

The GS index fund topped $1.8 trillion in net assets in the third week of November. ETF Advisors, run by Gary Gastineau, the market maven who helped pioneer some of the initial ETF products at the American Stock Exchange, last month released four fixed-income funds that track the Ryan Labs Treasury Index. These comprise on-the-run Treasuries as distinct from the typically older bonds in the Lehman benchmark.

Other new products include the Bank of New York/Nasdaq suite of four BLDRS, which will track indexes of American Depositary Receipts. These will be listed on Nasdaq, trading electronically right from the start, rather than through Amex's open-outcry system.