Exchange-traded funds: A primer
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Deborah Fuhr is a vice president, and Global Head of Marketing — OPALS and Exchange Traded Funds, at Morgan Stanley Co. International Limited in London. Ms Fuhr is responsible for international marketing for OPALS (Optimised Portfolios As Listed Securities and Exchange Traded Funds). She is also responsible for sales to accounts in the UK, Switzerland, the Netherlands, Belgium, Spain and Portugal. Prior to joining Morgan Stanley, Ms Fuhr was a director at Technimetrics in London and New York and an associate at Greenwich Associates, a financial services consulting firm. Ms Fuhr has an MBA from Northwestern University JL Kellogg Graduate School of Management and a BS from the University of Connecticut. Morgan Stanley & Co International, 25 Cabot Square, Canary Wharf, London E14 4QA, UK. Tel: ⫹44 (0)20 7425 5598; Fax: ⫹44 (0)20 7425 6996; e-mail: [email protected]
Abstract Essentially index funds that are listed and trade on exchanges like stocks, Exchange-traded Funds (ETFs) have opened a whole new panorama of investment opportunities to both individual investors and institutional money managers. At $56.3bn as of 31st October, ETF assets have soared from just $1.1bn in 1995. They account for about 12 per cent of all index mutual fund assets in the US and, according to a recent study by Financial Research Corporation, ETF assets are expected to roughly quadruple to $201bn and account for 27 per cent of index mutual fund assets in the US in five years’ time. ETFs account for over two-thirds of the daily trading volume on the American Stock Exchange. Most days, two or three ETFs are on the list of the top five most actively traded stocks on the AMEX. Characteristics of ETFs make them a viable alternative to trading futures and baskets of stocks for investors looking to increase or reduce their exposure to countries, sectors, industries and styles. ETFs allow investors the flexibility to use them for numerous applications, which can be appealing to both individual and institutional investors.
Introduction In a world in which new financial products come and go at the blink of an eye, ETFs may well be considered the leading financial innovation of the last decade. Essentially index funds that are listed and trade on exchanges like stocks, ETFs have opened a whole new panorama of investment opportunities to both individual investors and institutional money managers. These new instruments enable investors to gain broad exposure to entire stock markets of different countries and specific sectors with relative ease, on a real-time basis and at a
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Journal of Asset Management
lower cost than many other forms of investing. Uniquely for mutual fund-type products, ETFs can also be used to short an index, even on a down tick. They can be purchased on margin, are lendable and are purchased on a commission basis just like any other US share. At $56.3bn as of 31st October, ETF assets have soared from just $1.1bn in 1995. They account for about 12 per cent of all index mutual fund assets in the US: and, according to a recen
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