Investments, tenth edition

4.3 

    Exchange-traded  funds    (ETFs), first introduced in 1993, are offshoots of mutual funds 

that allow investors to trade index portfolios just as they do shares of stock. The first ETF 

was the “spider,” a nickname for SPDR, or Standard & Poor’s Depository Receipt, which 

is a unit investment trust holding a portfolio matching the S&P 500 Index. Unlike mutual 

    4.6 

Exchange-Traded Funds  

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P A R T   I

 Introduction

funds, which can be bought or sold only at the end of the day when NAV is calculated, 

investors can trade spiders throughout the day, just like any other share of stock. Spiders 

gave rise to many similar products such as “diamonds” (based on the Dow Jones Indus-

trial Average, ticker DIA), “cubes” (based on the NASDAQ 100 index, ticker QQQ), and 

“WEBS” (World Equity Benchmark Shares, which are shares in portfolios of foreign stock 

market indexes). By 2012, about $1 trillion was invested in more than 1,100 U.S. ETFs. 

 Table 4.3 , panel A presents some of the major sponsors of ETFs, and panel B gives a small 

flavor of the types of funds offered.   

  Figure  4.2  shows the rapid growth in the ETF market since 1998. Until 2008, most 

ETFs were required to track specified indexes, and ETFs tracking broad indexes still domi-

nate the industry. However, there are dozens of industry-sector ETFs, and as  Figure  4.2  

makes clear, commodity, bond, and international ETFs have grown especially dramatically 

in recent years. While only $1 billion was invested in commodity ETFs in 2004, by 2011 

this value had grown to $109 billion. Gold and silver ETFs dominate this sector, account-

ing for about three-quarters of commodity-based funds. Indeed, ETFs have become the 

main way for investors to speculate in precious metals.  Figure  4.3  shows that by 2011 

ETFs had captured a significant portion of the assets under management in the investment 

company universe.