The clearer reward to risk benefits that came about when the first exchange-traded fund [ETF] was introduced no longer applies to all exchange traded products [ETPs]. However, ETPs still remain an important vehicle for both traders and investors. Individuals must look more closely at the structure and underlying instruments associated with an ETP, but at the end of the day the simple tenet of understanding your risk still guides traders well.
The Standard & Poor’s Depository ReceiptsTM (SPDR®) which tracks the S&P 500® Index began trading on the American Stock Exchange under the ticker symbol SPY in 1993. It is a unit investment trust formed under the Investment Company Act that offered market participants some unique benefits. In my view the three most significant developments with the introduction of SPY were:
- Intraday trading and intrinsic value information
- Transparency of holdings and
- Option access.
Other notable advantages include certain tax efficiencies and limits on holding periods.
ETP Developments
Providing a full chronicle of ETP developments doesn’t seem to yield sufficient returns for this series, but I did want to introduce a few developments notable in my view. Although it includes some milestones identified by the NYSE’s ETP timeline introduced last article, the focus is more on changing risk issues.
fig 1 etp flow
Figure 1 A Brief History of ETP Developments
This flow differs slightly from the top article image displayed and added volatility instruments. Certainly other notable developments include market entry by major influencing firms such as iShares®, Vanguard® and more recently PIMCO, but that may be for another day.
Clare White, CMT
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
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