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Evolution of Exchange Traded Funds (Etfs) – Comparison U.S

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Evolution of Exchange Traded Funds (Etfs) – Comparison U.S Evolution of Exchange Traded Funds (ETFs) – Comparison U.S. and Indian Bourses markets) till 2015 have been studied. The sources Up to 1970, the mutual fund industry followed active Evolution of Exchange Traded Funds (ETFs) – include ETP Landscape- industry highlights management and tried to outperform the market (Blackrock), ETFGI monthlynews letters (ETFGI) through active selection of stocks. Owing to the high Comparison U.S. and Indian Bourses and annual reports of SEBI besides the abstracts expense ratio, rapid stock turnover and difficulties obtained from the websites of AMFI and respective encountered while forecasting market trends, 1 1 AMCs. mutual funds failed to provide returns superior to Prabhdeep Kaur and Jaspal Singh those of the market (Wiandt and McClatchy, 2002; 1 Department of Commerce, Guru Nanak Dev University, Amritsar EVOLUTION OF MUTUAL FUND INDUSTRY Lofton, 2007). The investment community, thus, started calling for a passively managed fund The mutual fund industry owes its existence that could provide returns similar to those of to a Dutch merchant and broker Abraham van a stock index at minimum cost (Ferri, 2002; Bourses across the world have endeavored to satisfy the Ketwich who invited people to collectively pool varying risk appetites of investors through innovations Lofton, 2007). Also, Eugene Fama in his paper INTRODUCTION their savings to form an investment trust named undertaken in the existing financial products. Exchange on efficient market hypothesis further proposed Exchange traded funds (ETFs) symbolize a “EendragtMaaktMagt” meaning “Unity Creates traded funds (ETFs) have debut the stock markets as close that the markets are efficient enough to reflect new investment avenue that aim to provide Strength” in 1774. The trust provided small competitors to both open-ended funds as well as close- all the available information and hence, any investors with the dual advantages of diversifying investors an opportunity to invest in profitable ended funds. The present paper attempts to provide an endeavor to beat the market wisdom will be insight into the mutual fund industry of the world's two their portfolio through investment in a avenues and hedge risk through diversification futile (Wiandt and McClatchy, 2002). Wells Fargo major economies, one representing the developed nations ingle security while simultaneously enabling real (Rouwenhorst, 2004). The trust was a huge success Bank developed the first index fund in 1971 that i.e. U.S. and the other symbolizing the developing nations time trading which, however, were not in Netherlands and survived for about 120 years aimed to replicate the returns of all the stocks i.e. India. The ETF industry in the two countries is found available in case of traditional mutual fund but was finally dissolved in 1893 (Ferri, 2007). comprising the New York Stock Exchange but the to differ on account of number of ETFs active in the trading. ETFs had their foundation laid in idea could not succeed owing to the huge expenses respective countries, resources mobilized as well as the open-ended and close-ended mutual funds. Hence, United States (U.S.) had its first investment incurred while executing strategies associated with types of investors participating in the relatively new an insight into the mutual fund industry is essential trust formed in 1893 named “Boston Personal industry. ETFs are found to have strengthened their roots the fund management (Ferri, 2002). John Bogle and to understand the evolution of Exchange Traded Property” which was the first close-ended fund in the U.S. economy whereas they are yet required to Dr. Burton Malkiel introduced the first Funds (ETFs). The present study studies the that traded on the U.S. stock exchange (Lofton, 2007). undergo a long journey before they could gain momentum Since these funds restricted the ability to create commercially successful index fund titled Vanguard in India. The study will be beneficial for the research and antecedents of ETFs that evolved over a period or redeem underlying shares, they started trading 500 Index Fund in 1976 that comprised of stocks investment community keen at understanding the of time to form the present structure of ETFs. at excessive premiums or discounts to their net included in the S&P 500 index (Lofton, 2007). evolution and growth of exchange traded funds. The paper lays emphasis on the origin, growth However, it was only after 1986 that the fund got and development of ETFs in US that holds the credit asset value (NAV) which made them unpopular wide acceptance from the investment community Keywords: Evolution, Exchange-traded funds, Index of providing the world with its first-ever ETF i.e. among the investment community (Davidson, 2012). funds, India, Mutual funds, U.S. (Ferri, 2002). In addition, the index fund industry in SPDR and extends the same to India which accounts Thereafter, the formation of the “Alexander U.S. gained impetus only from the year 1996 (IISP for one of the fastest growing economies of the Fund” in Philadelphia in 1907 paved way for Ltd., 2013). world. the development of open-ended mutual fund that allowed the creation and redemption of SOURCES OF QUANTITATIVE INFORMATION shares at regular intervals. However, the ORIGIN OF EXCHANGE TRADED FUNDS “Massachusetts Investors Trust (MIT)”, formed Since the present study attempts to provide a brief in 1924, holds the privilege of being the first true (THE U.S. SCENARIO) view of the US and Indian ETF industry and its U.S. mutual fund that is designed in accordance growth over time, reports by various investment with today's open-end structure (Ferri, 2007). With investors now tracking the market indexes institutions such asBlackrock, ETFGI(for the US The U.S. mutual fund industry witnessed peaks through holding a basket of securities, only one step market), AMFI (Association of Mutual Funds of and valleys for the next few years and with remained for Exchange Traded Funds (ETFs) to India), SEBI (Securities and Exchange Board of the establishment of the Investment Act of 1940, enter the market place (Wiandt and McClatchy, India) (for the Indian market) and respective AMCs the count of mutual funds increased substantially 2002). ETFs already had their genes laid in the (Asset Management Companies) (of both the in the next few decades (Lofton, 2007). program trading or portfolio trading that revolutionized the notion “trading” in late 70s and 116 Amity Business Review Amity Business Review 117 Vol. 18, No. 1, January - June, 2017 Vol. 18, No. 1, January - June, 2017 Evolution of Exchange Traded Funds (ETFs) – Evolution of Exchange Traded Funds (ETFs) – Comparison U.S. and Indian Bourses Comparison U.S. and Indian Bourses early 80s (Gastineau, 2001). Program trading At the same time, the U.S. Securities and Exchange complex, expensive and bearing only institutional the industry comprises of a wide variety of ETFs allowed the trading of a “basket of securities” like Commission (SEC), on the request of Leland, O'Brien appeal (Ferri, 2007). such as actively managed ETFs, fixed income ETFs, those in an index, as against the trading of an and Rubinstein (LOR) was making efforts to make global emerging market ETFs, leveraged ETFs and The American Stock Exchange (AMEX) was quick individual security, through the execution of a single way for the creation of a new exchange traded so on. As on 31 March 2015, the U.S. ETF industry enough to take advantage of the SuperTrust Act of order placed at the stock exchange (Carlson, 2006). product that could provide institutional and retail comprised of 1,405 ETFs from 59 providers with 1992 and filed a petition with the SEC to grant The simultaneous evolution of S&P 500 index investors with an easy way to hedge their positions. assets under management of around U.S. $ 2007 approval for the creation of the first ETF named futures enabled large institutional investors to As such, the Investment Company Act Release No. billion, listed at the three stock exchanges of the U.S. Standards and Poor's Depository Receipts (SPDRs), utilize program trading to hedge their positions 17809 was passed in 1990 that resulted in the (ETFGI, 2015). popularly known as spiders(Ferri, 2002). Spiders, through portfolio insurance, indulge in index formation of a new investment vehicle called managed by State Street Global Advisors (SSGA), arbitrage activities and pursue their other hedging SuperTrust. These advancements were in response started trading at AMEX in January 1993 (Ferri, THE INDIAN SAGA objectives (Furbush, 2002). As such, institutional to the stock market crash of 1987, a glimpse of which 2007). The structure of SPDRs is relatively simple investors started exploiting the strategy has been provided in the box. The structure of The year 2014-15 witnessed an increased investor and comprises of all the S&P 500 stocks, the aggressively in both cash and futures markets in SuperTrust was similar to that of index fund which confidence in the financial stability of the Indian proportion of which can be adjusted in accordance order to protect their respective interests. All these enabled institutional investors to trade an entire capital markets on account of strong fundamentals with the changes in the underlying index (Gatineau, developments aroused interest among the small portfolio consisting of S&P 500 stocks in a single and growth prospects reported for the Indian 2001). Each unit of the SPDRs is valued at 1/10th of institutions and retail investors for a portfolio that trade (Ferri, 2007). The new investment vehicle economy. During the year 2014-15, Indian ETFs the value of the underlying index (Ferri, 2002). Any could be traded easily in the market without combined the characteristics of both open-end and listed abroad such as the WisdomTree India discrepancy observed in the market value of spiders incurring any substantial cost (Gastineau, 2001).
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