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Under the Hood: The History and Structure of ETFs

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Exchange-traded funds are one of the fastest growing investment vehicles today among advisors and end clients. These instruments come in a variety of structures, each with a specific set of nuances and risks. If you plan to use ETFs in client portfolios, because of their complexity it would be prudent to gain the required knowledge beforehand.

In this article, we’ll learn where they began, discuss the differences in the five different types of ETF structures and identify the largest fund(s) in each group.

In a follow-up piece we’ll explore the differences between exchange-traded products and mutual funds. 

The Beginning

The first ETF was created in 1993 when State Street Global Advisors launched the SPDR S&P 500 ETF (SPY). As the name implies, this fund was established to track the performance of the S&P 500 Index. Today, with over $184 billion in assets, SPY is the largest of all ETFs. In fact, the closest ETF to it in size is the iShares Core S&P 500 ETF (IVV), with $67.5 billion. I find it interesting that the two largest ETFs track the same index and together comprise nearly 12% of the ETF asset universe. 

In the early days, ETFs were used primarily by institutional investors. However, this is changing as advisors are becoming increasingly aware of the benefits associated with these investment vehicles. 

The Structures

The five primary legal structures used with ETFs are:

1) Open-End Investment Company

2) Unsecured Debt Instrument (ETN)

3) Partnership

4) Grantor Trust

5) Unit Investment Trust (UIT) 

While there is a sixth structure, because it only applies to one ETF, we’ll bypass it. The following graph provides a breakdown of the five legal structures as measured by the number of ETFs in each. For example, the most common is the open-end investment company, which is utilized by more than 82% of all ETFs. 

Morningstar lists a total of 1,648 ETFs, and based on its data, the numerical breakdown by structure is as follows:

  • open-end investment company (1,356)
  • unsecured debt instrument or ETN (208)
  • partnership (54); grantor trust (20)
  • unit investment trust or UIT (8)

Now let’s briefly discuss each structure. 

1) Open-End Investment Companies

As mentioned, the great majority of ETFs are structured as open-end investment companies, a structure that offers the greatest flexibility and, in many respects, makes an ETF function like a mutual fund. Two providers dominate in this structure: nine of the largest 16 and 13 of the largest 25 ETFs with this structure are from Blackrock (iShares), while Vanguard offers seven of the top 16 and 10 of the largest 25. Together, these companies are responsible for 23 of the 25 largest ETFs using this structure. The largest fund with this structure is iShares Core S&P 500 (IVV) with assets exceeding $67.8 billion. Open-end investment companies are registered under the Investment Company Act of 1940. 

2) Unsecured Debt Instrument (ETN)

More commonly known as an exchange-traded note or ETN, this is the second most common legal structure. ETNs are issued by banks and are treated as a debt instrument; the first was launched in 2006. Assets in an ETN are subject to the claims and creditors of the issuing bank. In other words, if the issuing bank filed for protection under the bankruptcy code or if it ceased to operate for any reason, all funds invested in the ETN at that time would be at risk.

Approximately 50% of ETNs with this structure are established to track the performance of a currency or commodity index. The largest fund with this structure is the J.P. Morgan Alerian MLP ETN (AMJ) with $5.5 billion in assets.

Investments with this structure are registered under the Securities Act of 1933. 

3) Partnership

ETFs structured as a partnership comprise the third largest group, again based on the number of funds utilizing the structure. Similar to ETNs, the majority of the ETFs in this group are established to track currencies or commodities. The largest fund under this structure is PowerShares DB Commodity Tracking ETF (DBC) with nearly $3.8 billion under management.

ETFs with this structure are registered under the Securities Act of 1933. 

4) Grantor Trust

According to Morningstar data, every ETF with the legal structure of a grantor trust is in the currency or commodity category. The largest fund with this structure is the well known SPDR Gold Shares (GLD) with $31.3 billion. The second largest is also a gold ETF, the iShares Gold Trust (IAU) with $6.8 billion.

These ETFs are registered under the Securities Act of 1933. 

5) Unit Investment Trusts (UIT)

In a UIT designed to track an index, the fund manager is required to own every security in the underlying index. This differs from an ETN where the manager does not buy the actual securities. The largest ETF in this structure is also the first ETF created: the SPDR S&P 500 ETF (SPY) with over $184.0 billion. This is followed by another well-known ETF, the PowerShares QQQ ETF (QQQ) with $37.1 billion.

ETFs structured as a UIT are registered under the Securities Act of 1940. 


In this article, we took a high-level view of the five major legal structures for ETFs. We learned which ones are most utilized for commodity and currency investments and the risk associated with the ETN structure.

In our next posting in this series, we’ll examine the asset growth of the ETF industry from 1993 to the present, the number of ETFs each year during this period, and take a good look at the tax treatment of the various legal structures.


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