Market Movers

By Jeffrey Ressner/Los Angeles

Lee Kranefuss vividly remembers the nerve-racking launch of his exchange-traded fund IWM six years ago. As a top exec of Barclays Global Investors, Kranefuss held out big hopes for IWM, which tracks the benchmark index of small U.S. companies known as the Russell 2000. "I thought it could come out of the gate with huge trading volume, and it didn't," he says. Indeed, the fund languished for nearly four tortuous years.

But IWM is now a crown jewel in Barclays' family of exchange-traded funds--popularly known as ETFs--and on some days it trades more than 100 million shares. This year alone, says Barclays, IWM's assets have risen in value about 25%.

ETFs are among the hottest products hawked today by Wall Street. Tied to various indexes, countries, currencies, commodities or industry sectors, ETFs resemble mutual funds with some key differences. They are usually not managed, carry lower fees and can be bought, sold, optioned or shorted like individual stocks, endearing them to institutional investors as well as occasional traders.

ETFs are still a relatively small business--totaling $350 billion compared with some $7 trillion invested in conventional U.S. mutual funds. But ETFs are attracting so much attention that some financial pros believe they're moving markets in certain precious metals, alternative energy, water and other areas. Those pundits suggest that gold ETFs--formed by trusts that hoard the glistening, 400-oz. bars in London vaults--have become reflexive, a term applied by billionaire investor George Soros. Think self-fulfilling prophecy. In this case, it means the new ETFs signaled a shortage of physical gold available, making the metal jump in price and thus luring more new buyers. Gold is up more than 35% since its first U.S. ETF was announced in late 2004.

Jim Wiandt, a co-author of the first book about ETFs and publisher of website IndexUniverse.com says, "On its face, the daily volume of gold ETFs represents a drop in the bucket for the world market. But markets are reactionary to news, and there's no question that when the first gold ETF [GLD] came out, the market moved a lot."

A Washington-based trade group, the Silver Institute, believes that Barclays' launch of a new ETF called SLV played a key role in a recent run-up on that shiny metal. "Prior to the offering, Barclays placed 1.5 million ounces of silver with a custodian," reported the organization's Silver News update. "Anticipation of the ETF and other factors pushed silver to a 23-year high in mid-April." Morningstar analyst Sonya Morris explains that the silver market is "tighter" than other commodities and that "there was real concern Barclays' buying some huge stash to support their ETF was going to move the market." Interest-rate jitters and overheated speculation led to declining prices for most commodities beginning in May, however, and by the end of June, SLV was trading close to its lowest levels. Barclays downplays any notion that SLV, its gold fund IAU or, for that matter, any of its 184 other ETFs might have tilted global indexes. "ETFs as a whole represent about 5% of total mutual-fund assets, so they're not going to drive markets," says Barclays' Kranefuss.

Though popular and efficient, ETFs aren't always appropriate for novices. But they do allow you to play the commodities game without open-ended risk. Still, currency and commodity plays are volatile, a place for your more speculative investing. Of course, as Jack Sparrow, the buccaneer portrayed by Johnny Depp in Pirates of the Caribbean, says, "Not all treasure is silver and gold, mate." Maybe he's invested in the Russell 2000.