The fund, the first of its type based on the Irish market, offers private investors and institutions the opportunity to invest in the top 20 Irish publicly quoted companies through the efficiency of buying just a single security.

The fund has a total expense ratio of just 0.5 per cent, which includes all management, operating and service provider fees. In addition to facilitating low cost entry to the market, ETFs simplify the process for investors achieving greater diversity in their investment portfolios.

The exchange, led by Tom Healy, will hope it fuels increased private investor interest.

These twin attractions have made the product hugely popular in the US, where there is an estimated $15 billion worth of transactions in ETFs every day.

The fund is promoted by NCB Stockbrokers. Peter Duff, director of investment services at NCB, said there is a gap in the market for an Irish-based ETF, as international versions of the product were already widely used by its private clients.

The ETF may also become, over time, a core part of the investment portfolio of the typical Irish private investor, said Frank O'Brien, an independent financial markets strategist.

“In principle, ETF's are a very good idea for the private investor. One of the chief risks inherent in equities is that investors are not diversified sufficiently, that they place all their eggs in too few baskets.

“In terms of risk management, it makes sense to spread your risk among a basket of leading stocks. This particular fund appears to be an efficient way of achieving some diversity,” said O'Brien.

The ISEQ 20 ETF will be actively managed by Bank of Ireland Asset Management, who will review the portfolio each quarter. Companies are selected for inclusion on the combination of their market capitalisation and their liquidity.

The initial list of companies excludes the likes of C&C, even though the drinks company is one of the 20 largest stocks on the ISEQ. C&C has been excluded because of the 34 per cent shareholding in the company by private equity firm BC Partners is deemed to make the stock less liquid. This approach has led to the inclusion in the fund of bookmaker Paddy Power.

The ETF also attracts favourable tax treatment in that dividends paid out by the fund attract taxation at 23 per cent (capital gains tax plus exit tax) compared to taxation at the marginal rate for owners of regular stocks.

Duff said the product differs from other tracker products in that it can be bought and sold on an intra-day basis.

Tracker products are generally priced at the end of the day.

Last week, the Irish ISEQ 20 index traded on a 2005 price to earnings ratio of 13.3 and offered a dividend yield of 2.7 per cent. It compared well with ratings of 15.5 and 14.4 times for the S&P 500 and Datastream EU index respectively.

The overall Irish stock market is down 4 per cent since the start of the year, hit by the collapse of Elan. While there may be more slippage ahead, the long-term prospects are good, said O'Brien.

“I'd have a little concern in the short term, but the long-term story for Ireland looks strong as the economy is set to grow much faster than the rest of Europe.

“The leading Irish companies are in general very well managed. The ETF should make sense in the long-term,” said O'Brien.

By Ed Micheau