Exchange Traded Funds: A White Paper        Page 3

Although LOR developed the Index Trust SuperUnit as an investment underlying a hedge product, there was some discussion of the product being valuable as a stand-alone S&P 500 Index investment. The Index Trust SuperUnit enabled investors to trade directly in the S&P 500 Index as if it were a listed corporation. Yet, the Index Trust SuperUnit was marketed and priced as a hedge product and thus was not viable on its own.

Down Comes the SPDR (Pronounced "Spider")

The American Stock Exchange LLC, through its subsidiary PDR Services LLC and the Standard & Poors Depository Receipt (SPDR) Trust, took advantage of the SuperTrust Order to petition for and receive an SEC Order that in 1992 authorized a stand-alone S&P 500 Index-based ETF as a unit investment trust. The SPDR Order specified some additional exemptions allowing for easier exchange of shares, a concept pioneered in the SuperTrust and explained below.

Unlike the Index Trust SuperUnit, the SPDR gained acceptance in the marketplace and became the first commercially successful ETF.

OPALS

In 1993, Morgan Stanley took advantage of the less restrictive regulatory environment for issuing securities in Luxembourg to create Optimized Portfolios as Listed Securities (OPALS) that are listed on the Luxembourg stock exchange. OPALS are ETFs that reflect different Morgan Stanley Capital International (MSCI) indexes. OPALS are marketed primarily to institutional investors whose governments approve the offering of OPALS. OPALS Class B shares are available in the U.S. to institutional investors with at least $100 million under management. OPALS have low expenses that range from 9 to 40 basis points.

Morgan Stanley gained valuable experience with OPALS. Since OPALS are not subject to the restrictions imposed on SEC-authorized unit investment trusts, Morgan Stanley had broader investment management discretion over OPALS. Morgan Stanley had the opportunity to try out new investment techniques that would later be applied to SEC-authorized ETFs.
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