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A Letter From ICI’s Chief
Economist

2005 Facts at a Glance

ICI Research: Staff and
Publications

SECTION ONE:
Overview of U.S.-Registered
Investment Companies

SECTION TWO:
Recent Mutual Fund
Trends

SECTION THREE:
Exchange-Traded Funds

SECTION FOUR:
Closed-End Funds

SECTION FIVE:
Mutual Fund Fees and
Expenses

SECTION SIX:
Mutual Fund Owners:
Who Are They and
Where Do They
Purchase Fund Shares?

SECTION SEVEN:
The Role of Mutual Funds
in Retirement and
Education Savings

DATA TABLES

APPENDIX A:
How Mutual Funds and
Investment Companies
Operate

APPENDIX B:
ICI Statistical Releases
and Research

GLOSSARY OF TERMS

FACT BOOK ARCHIVE

Exchange-traded funds are a relatively recent innovation to the investment company concept, with the first ETF introduced in 1993 after a fund sponsor received U.S. Securities and Exchange Commission exemptive relief from various provisions of the Investment Company Act of 1940. In the 12 years since, the number of ETFs has grown to about 200, and assets have reached nearly $300 billion.

What Is an ETF?

ETFs are registered investment companies, most of which seek to mirror the return of a particular market index, such as the S&P 500 or the Russell 2000. Although most ETFs are registered as open-end funds, there are some key differences between ETFs and other open-end funds such as mutual funds.

One difference is how retail investors buy and sell shares. A retail investor in a mutual fund typically purchases or redeems shares directly with the fund. By contrast, retail shareholders in an ETF do not conduct transactions directly with the ETF but instead buy or sell ETF shares on a stock exchange, just as they would the shares of a publicly traded company. ETF shares originally enter the market through an institutional investor, known as a creation unit holder. These investors deposit with the ETF sponsor a specified basket of securities. In return for this basket of securities, the ETF issues to the creation unit holder a specified number of fund shares, which can be sold to the public through a stock exchange. A creation unit holder can liquidate its position by returning a fixed number of ETF shares to the ETF; in return, the creation unit holder receives the basket of securities it had deposited with the ETF. A retail investor in an ETF could liquidate their position by selling their ETF shares on a stock exchange.

Another feature that distinguishes ETFs from open-end funds is pricing. ETF shares may trade above or below the underlying value of the securities in the fund. Unlike a mutual fund, whose price per share is based on the fund’s net asset value (NAV), an ETF’s share price is influenced by the forces of supply and demand. For example, when investor demand increases, the ETF share price rises. However, ETFs are structured so that large differences between their share price and the value of the underlying basket of securities do not exist for long periods of time. Creation unit holders counteract the impact of supply and demand for ETF shares by buying and selling ETF shares in the market, and if necessary, by creating or redeeming creation units with the fund. In doing so, creation unit holders help keep the market price of an ETF’s shares close to the underlying value of its securities.

Net Assets of ETFs

(millions of dollars, 1993–2005)

Download an Excel file of this data.

Note: Components may not add to the total because of rounding.
Sources: Investment Company Institute and Strategic Insight Simfund

Development of the ETF Market

The first ETF was a broad-based domestic equity fund that tracked the S&P 500 index, and was registered as a UIT. ETFs saw modest growth until the late 1990s, when demand for exchange-traded funds accelerated as retail investors and their financial advisers became increasingly aware of these investment companies. The market for exchange-traded funds was also bolstered by demand from institutional investors, who found ETFs to be a convenient vehicle for participating in, or hedging against, broad movements in the stock market.

As demand for ETFs grew, ETF sponsors offered more funds and a greater variety of investment objectives. In the mid-1990s, ETF sponsors introduced funds that invested in foreign stock markets. More recently, sponsors have introduced funds that invest in particular market sectors or industries as well as bond index funds. For example, fund companies introduced 23 sector/industry ETFs in 2005. Sponsors have also introduced country-specific funds, funds that track commodities, and funds tracking highly specialized indexes. Since the mid-1990s, ETF sponsors have predominantly chosen to register their new funds as open-end investment companies. In 2005, most ETFs were open-end investment companies.

Number of ETFs

(1993–2005)

Download an Excel file of this data.

Sources: Investment Company Institute and Strategic Insight Simfund

ETF assets have grown rapidly since the late-1990s, approximately doubling every two years. Much of this increase is attributable to net issuance of new shares. From year-end 1998 through 2005, ETFs issued $255 billion in net new shares. Investor demand for broad-based domestic equity funds accounted for much of this growth. These funds issued more than $165 billion in net new shares during this period, and assets of these funds reached $187 billion by year-end 2005. Demand for global and international ETFs also rose sharply in recent years, mirroring an increase in investor interest in mutual funds investing in foreign markets. International and global ETFs issued $39 billion in net new shares from year-end 2003 through 2005, and assets of these funds reached $65 billion.

For more complete data on exchange-traded funds, see Section 2 in the Data Tables the Statistics and Research section of this site.

Net Issuance of ETF Shares

(millions of dollars, 1993–2005)

Download an Excel file of this data.

Note: Components may not add to the total because of rounding.
Sources: Investment Company Institute and Strategic Insight Simfund

Demand for ETFs and Index Investments

The growing demand for ETFs also parallels an increase in demand for indexed investments in general. By 2005, assets in index mutual funds and ETFs totaled $865 billion, which is about 9 percent of the total assets managed by all registered investment companies. Much of this growth has occurred among funds tracking broad market indexes, especially those indexes tracking large companies. Funds indexed to the S&P 500 manage about 40 percent of all assets invested in ETFs and index mutual funds. These funds are typically regarded as large-blend domestic stock funds. S&P 500 and other broad-based index funds now manage 37 percent of the large-blend domestic stock assets invested in registered investment companies. Index funds and ETFs are available in most other broad asset classes, but to date have attracted less investor interest than have broad-based domestic stock index funds.

Assets of ETFs and Index Mutual Funds Are Concentrated in Large-Blend
Domestic Equity

(billions of dollars, 2005)

Download an Excel file of this data.

Sources: Investment Company Institute and Federal Reserve Board