Josef Schuster this week celebrated the second birthday of his company, which compiles stock indices, by ringing the opening bell on the American Stock Exchange.

New indices have never been more popular, partly as a way of measuring the markets, but more lucratively as underlying benchmarks on which to base new exchange-traded funds, or ETFs.

This occasion was a sort of IPO of IPOs – the initial public offering of the first ETF to track IPOs. Offered by First Trust, the ETF (ticker: FPX) is based on Mr Schuster’s IPOX index.

ETFs are multiplying at a dizzying rate. The funds are designed as low cost, passively managed index trackers which, unlike mutual funds, are themselves actively traded on exchanges, theoretically giving investors an easy “in” and “out”.

By the end of February this year, $315bn was invested in US-listed ETFs, according to the Investment Company Institute. While the sector is still just a tiddler compared with the $9,200bn invested in mutual funds, the amount in ETFs has risen 41 per cent in the last year.

The sector is even big enough to have mutual funds sniffing around. The PathMaster Domestic Equity Fund is mostly invested in ETFs as a handy way of replicating market segments by size and style.

Despite Thursday’s quiet, pre-Easter activity, brokers and specialists on the floor still raised a cheer for FPX – the 14th ETF to list on Amex this year.

And Thursday’s launch was in fact the second “first” for the Amex in a week after it opened trading on Monday with the United States Oil Fund (ticker: USO) – the first US-listed ETF that aims to track the oil price.

Touted as the ordinary investor’s first chance to make a direct play on the oil price – as opposed to buying oil company stock – a hefty 4m shares in USO traded on the first day. Like Deutsche Bank’s DB Commodity Index Tracking fund (DBC) that launched last month, it won’t actually invest in the commodity but in futures contracts, holding spare cash in Treasuries.

If anything, the launches of new funds covering different asset classes is spurring on ETF product developers to find even more ways of slicing up the markets, thus moving further away from the plain-vanilla ETFs, such as the S&P trackers – known as SPDRs (spiders) – that launched the sector in 1993. It should be noted that most of the funds invested in ETFs are still held in SPDRs and their rivals.

Late last year, the first currency ETF was launched, the Rydex Euro Currency Trust (FXE). The company has filed another six ETF proposals with the Securities and Exchange Commission, tracking currencies from the Mexican peso to the Swedish krona.

Next to market, however, could be silver. The SEC has given a preliminary
nod to the proposal from Barclay’s Global Investors for an ETF tracking the metal. Its price has already hit 22-year highs on bets that the fund could repeat the success of State Street’s StreetTracks Gold ETF, which launched in 2004.

ETF supporters have been pushing the easy diversification angle – that investors can buy into a fund representing an asset class, a sector or a country, such as Brazil – without the hassle and cost of leaving the comfort of their home markets.

But just how specific do you want to get, and is there always diversification value?

Are great leaps imminent in the derma and wound care world? Or perhaps in the respiratory and pulmonary space? These are just two of 12 suggested funds Ferghana-Wellspring has filed with the Securities and Exchange Commission.

As a rule of thumb, the more specialised the ETF, the less liquid its trading will be since, logically, it will attract less interest, and bid/offer spreads will be wider. So investors could find that the easy exit promised by exchange trading still comes at a cost.

And there’s potentially another side effect, the impact of the fund on the underlying asset in less liquid sectors. In some cases, ETFs already seem to have taken over from hedge funds as the catch-all reason used to explain particular price moves.

Then again, investors riding the wilder reaches of the ETF world might find the FW Cardiology Index fund a nice hedge for their future medical bills.

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