Chart that tells a story - ETF growth

What does this show?

It's the growth in exchange traded funds and products, in terms of both number and assets under administration, since they were launched in Europe 15 years ago this week.

The first UK-traded ETF was created by Barclays Global Investors and tracked the FTSE 100 index. BGI was sold to BlackRock in 2009 and the same product - since rebadged the iShares Core FTSE 100 - now has £3.7bn under management. Along with iShares, Societe Generale, HSBC, Vanguard, UBS and Deutsche Bank are big issuers of ETFs.

What's the difference between ETFs and ETPs?

Exchange-traded product is a catch-all term for open-ended investments that are quoted on an exchange and traded and settled like equities. Within that, ETFs track a suitably diversified index and comply with European "Ucits" rules. Exchange-traded commodities track single commodities while exchange-traded notes are debt instruments. Neither is Ucits-compliant.

Who's been buying?

In Europe, institutions initially drove the take-up of ETFs. But their popularity has increased among retail investors too. Adam Laird, head of passives at Hargreaves Lansdown, notes that there was a big rise in ETF use during the financial crisis because investors valued their continuous liquidity - they can be traded at any time during market hours, unlike conventional index tracking funds which only price once a day. There is also a much wider choice of ETFs than conventional trackers.

Are there really more than 2,000 products?

Yes. Although that figure covers all European exchanges, it does not include funds that track the same indices or assets but which are available in different currencies. "Globally, ETFs are about to surpass hedge funds and I think that would have been surprising for many people when the [ETF] industry started up," says Deborah Fuhr, founder of consultancy ETFGI. She predicts the European industry will have more than $1tn under management by 2020.

Surely that's too many?

Almost certainly. Many products are illiquid and subscale, and there has been some consolidation among providers too. "There are an awful lot [of ETFs]. It's difficult for investors to know which are the right ones," says Mr Laird.

"A number of ETF providers have started to close ETFs that weren't really doing their job," says Ben Seager-Scott at TilneyBestInvest. "The numbers do need pruning. We'll see some canning of products . . . but we'll see a lot more launches in the 'smart beta' area."

Has scale lowered ETF costs?

Yes, especially on the mainstream products. BGI charged 0.40 per cent for the FTSE 100 ETF when it launched; the same fund now costs 0.07 per cent a year. "They have cut prices very aggressively. It's questionable how much lower they can go," says Mr Seager-Scott.

However, away from the mainstream indices, funds tend to be a lot smaller and charges a good deal higher - often over 0.6 per cent for a specialist product.

So everyone loves ETFs, right?

Not exactly. One high-profile critic is Terry Smith, founder of fund management group Fundsmith and FT Money columnist, who says they are much more risky than many investors appreciate and are often created as moneymaking sidelines for investment banks.

That's a point echoed by John Bogle, founder of index-tracking specialist Vanguard (which itself offers ETFs), who has witheringly described them as "the greatest marketing innovation of the 21st century".

"The only sure winners [from the rise of ETFs] are the brokers and dealers of Wall Street."

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