Exchange-traded funds (ETFs) appeared in the early 1990s. Since then, they have been growing fast – the number of ETFs rocketed from 30 with billion in assets in 2000 to more than 650 with 0 billion in assets in the USA only in May, 2008. As a survey of investment professional held by State Street Global Advisors (SSgA) in March 2008 stated, 67% of respondents considered ETFs to be the most innovative investment vehicle of the last two decades and 60% claimed that ETFs changed considerably the way they create their portfolios. So, what is an ETF? 

An ETF is a security that represents an entire basket of stocks (like mutual funds) and is traded on stock exchange. ETFs hold a set of stocks, which gives the advantage to have a diversified portfolio with just one purchase, saving time and expense of purchasing individual securities (tax efficiency). ETFs are traded on stock exchanges, thus experiencing price changes throughout the day, which means an ETF, unlike mutual funds, does not have its net asset value (NAV) calculated every day. It makes ETFs very flexible and liquid because buying and selling ETFs at their current prices during the day is possible (not at the end of every day like mutual funds). ETFs track indexes and because of it are passively managed, which makes annual management fees quite lower than for mutual funds. Also it is allowed to sell short the ETFs, which opens an opportunity to go short in indexes and commodities. 

There are several types of ETFs such as international, commodity, currency, leveraged ETFs etc., however, the first two types are the most common. Commodities ETFs generally invest in such commodities as precious metals, energy, agriculture or industrial metals. A commodity ETF is a security that tracks the prices of commodities but doesn’t give any commodities in physical possession, which helps to avoid transportation and commodity storage costs. The first Exchange-Traded Fund (ETF) was composed of gold and was offered to investors in a number of countries. Another type of exchange-traded funds is international ETFs. They usually track the indices of stock exchange markets of the particular countries.  Therefore, these ETFs are sensitive to the events and shocks that the country is involved in as well as to changes of stock market prices of the companies included in the ETF portfolio. Different companies hold for different weights in an ETF, thus one has always to pay attention to the composition of the ETF in respect to companies included and sectors covered.  

Through the diversification of portfolios ETFs help to reduce the diversifiable risk. However, as any other investments ETFs also involve risk. They are sensitive to general level of related commodities or securities, the performance of sectors they are based on, economic or political instability in the world, unfavorable fluctuations in currency values, interest rate changes (that lead to bond value changes). Therefore, general tendencies among ETFs depend on overall economic situation in the world, especially in the most important industrial countries and regions such as the USA, China, Japan, and the EU. Weekly changes in ETFs can be explained with economic news from these regions concerning GDP, unemployment rate, inflation rate and other macroeconomic indicators.