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[Click Here For Details](   An exchange-traded fund ETF is a type of investment fund that is also an exchange-traded product ie it is traded on stock exchanges123 ETFs own financial assets such as stocks bonds currencies debts futures contracts and/or commodities such as gold bars The list of assets that each ETF owns as well as their weightings is posted on the website of the issuer daily or quarterly in the case of active non-transparent ETFs Many ETFs provide some level of diversification compared to owning an individual stock An ETF divides ownership of itself into shares that are held by shareholders Depending on the country the legal structure of an ETF can be a corporation trust open-end management investment company or unit investment trust45 Shareholders indirectly own the assets of the fund and are entitled to a share of the profits such as interest or dividends and would be entitled to any residual value if the fund undergoes liquidation They also receive annual reports An ETF generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value although deviations can occur6 The largest ETFs which passively track stock market indices have annual expense ratios as low as 003 of the amount invested although specialty ETFs can have annual fees of 1 or more of the amount invested These fees are paid to the ETF issuer out of dividends received from the underlying holdings or from the sale of assets7 In the United States there is 54 trillion invested in equity ETFs and 14 trillion invested in fixed-income ETFs In Europe there is 10 trillion invested in equity ETFs and 04 trillion invested in fixed-income ETFs In Asia there is 09 trillion invested in equity ETFs and 01 trillion invested in fixed-income ETFs In the first quarter of 2023 trading in ETFs accounted for 32 of the total dollar volume of stock market trading in the US 11 of trading volume in Europe and 13 of trading volume in Asia8 In the US the largest ETF issuers are BlackRock iShares with a 34 market share Vanguard with a 29 market share State Street Global Advisors with a 14 market share Invesco with a 5 market share and Charles Schwab with a 4 market share9 ETFs are regulated by governmental bodies such as the SEC and the CFTC in the United States and are subject to securities laws such as the Investment Company Act of 1940 and the Securities Exchange Act of 1934 in the United States Closed-end funds are not considered to be ETFs even though they are funds and are traded on an exchange they do not change the number of shares they have issued unlike an ETF Exchange-traded notes are debt instruments that are not exchange-traded funds ETFs vs mutual funds ETFs are similar in many ways to mutual funds except that ETFs are bought and sold from other owners throughout the day on stock exchanges whereas mutual funds are bought and sold from the issuer based on their price at days end ETFs are also more transparent since their holdings are generally published online daily and in the United States are more tax efficient than mutual funds101112 Unlike mutual funds ETFs trade on a stock exchange can be sold short can be purchased using funds borrowed from a stockbroker margin and can be purchased and sold using limit orders with the buyer or seller aware of the price per share in advance1314 Costs and fees Both ETFs and mutual funds charge annual expense ratios that range from 003 of the investment value to upwards of 1 of the investment value Mutual funds generally have higher annual fees since they have higher marketing distribution and accounting expenses 12b-1 fees15 ETFs are also generally cheaper to operate since unlike mutual funds they do not have to buy and sell securities and maintain cash reserves to accommodate shareholder purchases and redemptions16171819 Stockbrokers may charge different commissions if any for the purchase and sale of ETFs and mutual funds In addition sales of ETFs in the United States are subject to transaction fees that the national securities exchanges must pay to the SEC under section 31 of the Securities Exchange Act of 1934 which as of February 2023 is 8 per 1 million in transaction proceeds20 Many mutual funds can be bought commission-free from the issuer although some charge front-end or back-end loads while ETFs do not have loads at all21 Taxation In the United States ETFs can be more attractive tax-wise than mutual funds for transactions made in taxable accounts However there are no tax benefits to ETFs compared to mutual funds in the United Kingdom and Germany222324 In the US whenever a mutual fund realizes a capital gain that is not balanced by a realized loss ie when the fund sells appreciated shares to meet investor redemptions its shareholders who hold the fund in taxable accounts must pay capital gains taxes on their share of the gain2526 However ETF investors generally only realize capital gains when they sell their own shares for a gain27 ETFs offered by Vanguard are actually a different share class of its mutual funds and do not stand on their own however they generally do not have any adverse tax issues28293031 Trading ETFs can be bought and sold at current market prices at any time during the trading day unlike mutual funds which can only be traded at the end of the trading day Also unlike mutual funds investors can execute the same types of trades that they can with a stock such as limit orders which allow investors to specify the price points at which they are willing to trade stop-loss orders margin buying hedging strategies and there is no minimum investment requirement ETFs can be traded frequently to hedge risk or implement market timing investment strategies whereas many mutual funds have restrictions on frequent trading432 Options including put options and call options can be written or purchased on most ETFs – which is not possible with mutual funds allowing investors to implement strategies such as covered calls on ETFs There are also several ETFs that implement covered call strategies within the funds333435 Many mutual funds must be held in an account at the issuing firm while ETFs can be traded via any stockbroker Some stockbrokers do not allow for automatic recurring investments or trading fractional shares of ETFs while these are allowed by all mutual fund issuers10 The most popular ETFs such as those tracking the SP 500 trade tens of millions of shares per day and have strong market liquidity while there are many ETFs that do not trade very often and thus might be difficult to sell compared to more liquid ETFs The most active ETFs are very liquid with high regular trading volume and tight bid-ask spreads the gap between buyer and sellers prices and the price thus fluctuates throughout the day This is in contrast with mutual funds where all purchases or sales on a given day are executed at the same price at the end of the trading day Transparency Issuers are required by regulators to publish the composition of their portfolios on their websites daily or quarterly in the case of active non-transparent ETFs363738 ETFs are priced continuously throughout the trading day and therefore have price transparency39 Categories of ETFs Index ETFs Index ETFs - Most ETFs are index funds that is they track the performance of an index generally by holding the same securities in the same proportions as a certain stock market index bond market index or other economic index Examples of large Index ETFs include the Vanguard Total Stock Market ETF NYSE Arca VTI which tracks the CRSP US Total Market Index ETFs that track the SP 500 which are issued by The Vanguard Group NYSE Arca VOO iShares NYSE Arca IVV and State Street Corporation NYSE Arca SPY ETFs that track the NASDAQ-100 index Nasdaq QQQ and the iShares Russell 2000 ETF NYSE Arca IWM which tracks the Russell 2000 Index entirely composed of companies with small market capitalizations Other funds track indices of a certain country or include only companies that are not based in the United States for example the Vanguard Total International Stock Index ETF NYSE Arca VXUS tracks the MSCI All Country World ex USA Investable Market Index the iShares MSCI EAFE Index ETF NYSE Arca EFA tracks the MSCI EAFE Index and the iShares MSCI Emerging Markets ETF NYSE Arca EEM tracks the MSCI Emerging Markets index Some ETFs track a specific type of company such as the iShares Russell 1000 Growth ETF NYSE Arca IWF which tracks the growth stocks in the Russell 1000 Index State Street Corporation has issued ETFs that track the components of the SP 500 in each industry for example the Technology Select Sector SPDR Fund NYSE Arca XLK tracks the components of the SP 500 that are in the technology industry and The Financial Select Sector SPDR Fund which tracks the components of the SP 500 that are in the financial industry The iShares Select Dividend ETF replicates an index of high dividend paying stocks40 Other indexes on which ETFs are based focus on specific niche areas such as sustainable energy or environmental social and corporate governance41 Most index ETFs invest 100 of their assets proportionately in the securities underlying an index a manner of investing called replication Some index ETFs such as the Vanguard Total Stock Market Index Fund which tracks the performance of thousands of underlying securities use representative sampling investing 80 to 95 of their assets in the securities of an underlying index and investing the remaining 5 to 20 of their assets in other holdings such as futures option and swap contracts and securities not in the underlying index that the funds adviser believes will help the ETF to achieve its investment objective42434445 Factor ETFs are index funds that use enhanced indexing which combines active management with passive management in an attempt to beat the returns of an index Factor ETFs tend to have slightly higher expense ratios and volatility than strictly passive index ETFs464748 Synthetic ETFs which are common in Europe but rare in the United States are a type of index ETF that does not own securities but tracks indexes using derivatives and swaps They have raised concern due to lack of transparency in products and increasing complexity conflicts of interest and lack of regulatory compliance495051 A synthetic ETF has counterparty risk because the counterparty is contractually obligated to match the return on the index The deal is arranged with collateral posted by the swap counterparty which arguably could be of dubious quality These types of set-ups are not allowed under the European guidelines Undertakings for Collective Investment in Transferable Securities Directive 2009 UCITS5253 Counterparty risk is also present where the ETF engages in securities lending or total return swaps54 The difference between the performance of an index fund and the index itself is called the tracking error this difference is usually negative except during flash crashes and other periods of extreme market turbulence for index funds that do not use full replication and for indices that consist of illiquid assets such as high-yield debt555645758 Actively managed ETFs Actively managed ETFs include active management whereby the manager executes a specific trading strategy instead of replicating the performance of a stock market index The securities held by such funds are posted on their websites daily or quarterly in the cases of active non-transparent ETFs The ETFs may then be at risk from people who might engage in front running since the portfolio reports can reveal the managers trading strategy Some actively managed equity ETFs address this problem by trading only weekly or monthly59 The largest actively managed ETFs are the JPMorgan Equity Premium Income ETF NYSE JEPI which charges 035 in annual fees JPMorgan Ultra-Short Income ETF NYSE JPST which charges 018 in annual fees and the Pimco Enhanced Short Duration ETF NYSE MINT which charges 036 in annual fees60 Thematic ETFs Thematic ETFs are ETFs including both Index ETFs and actively managed ETFs that focus on a theme such as disruptive technologies climate change shifting consumer behaviors cloud computing robotics electric vehicles the gig economy e-commerce or clean energy6162 Bond ETFs Bond ETFs are exchange-traded funds that invest in bonds63 Bond ETFs generally have much more market liquidity than individual bonds64 Commodity ETFs Commodity ETFs invest in commodities such as precious metals agricultural products or hydrocarbons such as petroleum and are subject to different regulations than ETFs that own securities6566 Commodity ETFs are generally structured as exchange-traded grantor trusts which gives a direct interest in a fixed portfolio SPDR Gold Shares a gold exchange-traded fund is a grantor trust and each share represents ownership of one-tenth of an ounce of gold6768 Most commodity ETFs own the physical commodity SPDR Gold Shares NYSE Arca GLD owns over 40 million ounces of gold in trust69 iShares Silver Trust NYSE Arca SLV owns 18000 tons of silver70 Aberdeen Standard Physical Palladium Shares NYSE Arca PALL owns almost 200000 ounces of palladium71 and Aberdeen Standard Physical Platinum Shares ETF NYSE Arca PPLT owns over 11 million ounces of platinum72 However many ETFs such as the United States Oil Fund by United States Commodity Funds NYSE Arca USO only own futures contracts73 which may produce quite different results from owning the commodity In these cases the funds simply roll the delivery month of the contracts forward from month to month This does give exposure to the commodity but subjects the investor to risks involved in different prices along the term structure such as a high cost to roll7475 They can also be index funds tracking commodity indices Currency ETFs Currency ETFs enable investors to invest in or short any major currency or a basket of currencies They are issued by Invesco and Deutsche Bank among others Investors can profit from the foreign exchange spot change while receiving local institutional interest rates and a collateral yield76 Leveraged ETFs See also Leverage finance Leveraged ETFs LETFs and Inverse ETFs use investments in derivatives to seek a daily return that corresponds to a multiple of or the inverse opposite of the daily performance of an index77 For example Direxion offers leveraged ETFs and inverse exchange-traded funds that attempt to produce 3x the daily result of either investing in NYSE Arca SPXL or shorting NYSE Arca SPXS the SP 5007879808182 To achieve these results the issuers use various financial engineering techniques including equity swaps derivatives futures contracts and rebalancing and re-indexing83 The rebalancing and re-indexing of leveraged ETFs may have considerable costs when markets are volatile Leveraged ETFs effectively increase exposure ahead of a losing session and decrease exposure ahead of a winning session8384 This is called volatility drag or volatility tax The rebalancing problem is that the fund manager incurs trading losses because he needs to buy when the index goes up and sell when the index goes down in order to maintain a fixed leverage ratio8586878889 Leverage possesses a dual nature as it has the potential to result in substantial profits yet it also carries the risk of substantial losses90 Cryptocurrency ETFs Cryptocurrency ETFs invest in cryptocurrencies such as Bitcoin Ethereum or a basket of different cryptocurrencies There are two types of crypto ETFs Spot crypto ETFs invest directly in cryptocurrencies tracking their real-time prices and their share prices will fluctuate with the prices of the cryptocurrencies they hold On the other hand future-based crypto ETFs refer to equities that do not invest directly in cryptocurrencies but rather in crypto futures contracts These contracts are agreements to buy or sell cryptocurrencies at a predetermined price in the future As a result the share prices and price fluctuating trends of funds in these two types could be different even though they hold identical cryptocurrencies and amounts9192 Arbitrage mechanism ETF shares are created and redeemed when large broker-dealers called authorized participants AP act as market makers and purchase and redeem ETF shares directly from the ETF issuer in large blocks generally 50000 shares called creation units Purchases and redemptions of the creation units are generally in kind with the AP contributing or receiving securities of the same type and proportion held by the ETF the lists of ETF holdings are published online66 The ability to purchase and redeem creation units gives ETFs an arbitrage mechanism intended to minimize the potential deviation between the market price and the net asset value of ETF shares APs provide market liquidity for the ETF shares and help ensure that their intraday market price approximates the net asset value of the underlying assets66 Other investors such as individuals using a retail broker trade ETF shares on the secondary market If there is strong investor demand for an ETF its share price will temporarily rise above its net asset value per share giving arbitrageurs an incentive to purchase additional creation units from the ETF issuer and sell the component ETF shares in the open market The additional supply of ETF shares reduces the market price per share generally eliminating the premium over net asset value A similar process applies when there is weak demand for an ETF its shares trade at a discount from their net asset value When new shares of an ETF are created due to increased demand this is referred to as ETF inflows When ETF shares are converted into the component securities this is referred to as ETF outflows93 ETFs are dependent on the efficacy of the arbitrage mechanism in order for their share price to track net asset value History ETFs had their genesis in 1989 with Index Participation Shares IPS an SP 500 proxy that traded on the American Stock Exchange and the Philadelphia Stock Exchange This product was short-lived after a lawsuit by the Chicago Mercantile Exchange was successful in stopping sales in the United States949596 The argument against the IPS approach was that it resembled a futures contract because the investments held an index rather than holding the actual underlying stocks97 In 1990 a similar product Toronto Index Participation Shares which tracked the TSE 35 and later the TSE 100 indices started trading on the Toronto Stock Exchange TSE in 1990 The popularity of these products led the American Stock Exchange to try to develop something that would satisfy regulations by the US Securities and Exchange Commission98 Nathan Most and Steven Bloom under the direction of Ivers Riley and with the assistance of Kathleen Moriarty99 designed and developed Standard Poors Depositary Receipts NYSE Arca SPY which were introduced in January 1993100101102 Known as SPDRs or Spiders the fund became the largest ETF in the world In May 1995 State Street Global Advisors introduced the SP 400 MidCap SPDRs NYSE Arca MDY It is a frequent topic in the financial press that ETFs have a quick growth These popular funds with assets more than doubling each year since 1995 as of 2001 have been warmly embraced by most advocates of low–cost index funds Vanguard is the leading advocate of index funds103 Barclays in conjunction with MSCI and Funds Distributor Inc entered the market in 1996 with World Equity Benchmark Shares WEBS which became iShares MSCI Index Fund Shares WEBS originally tracked 17 MSCI country indices managed by the funds index provider Morgan Stanley WEBS were particularly innovative because they gave casual investors easy access to foreign markets While SPDRs were organized as unit investment trusts WEBS were set up as a mutual fund the first of their kind104105 In 1998 State Street Global Advisors introduced Sector Spiders separate ETFs for each of the sectors of the SP 500106 Also in 1998 the Dow Diamonds NYSE Arca DIA were introduced tracking the Dow Jones Industrial Average In 1999 the influential cubes was launched with the goal of replicate the price movement of the NASDAQ-100 – originally QQQQ but later Nasdaq QQQ The iShares line was launched in early 2000 By 2005 it had a 44 market share of ETF assets under management107 Barclays Global Investors was sold to BlackRock in 2009 In 2001 The Vanguard Group entered the market by launching the Vanguard Total Stock Market ETF NYSE Arca VTI which owns every publicly traded stock in the United States108 Some of Vanguards ETFs are a share class of an existing mutual fund iShares issued the first bond funds in July 2002 iShares IBoxx Invest Grade Corp Bond Fund NYSE Arca LQD which owns corporate bonds and a TIPS fund109 In 2007 iShares introduced an ETF that owns high-yield debt and an ETF that owns municipal bonds and State Street Global Advisors and The Vanguard Group also issued bond ETFs In December 2005 Rydex now Invesco launched the first currency ETF the Euro Currency Trust NYSE Arca FXE which tracked the value of the Euro110111 In 2007 Deutsche Banks db x-trackers launched the EONIA Total Return Index ETF in Frankfurt tracking the Euro In 2008 it launched the Sterling Money Market ETF LSE XGBP and US Dollar Money Market ETF LSE XUSD in London In November 2009 ETF Securities launched the worlds largest FX platform tracking the MSFXSM Index covering 18 long or short USD ETC vs single G10 currencies112 The first leveraged ETF was issued by ProShares in 200677 In 2008 the SEC authorized the creation of ETFs that use active management strategies66 Bear Stearns launched the first actively managed ETF the Current Yield ETF NYSE Arca YYY which began trading on the American Stock Exchange on March 25 2008113114115 In December 2014 assets under management by US ETFs reached 2 trillion116 By November 2019 assets under management by US ETFs reached 4 trillion117118119 Assets under management by US ETFs grew to 55 trillion by January 2021120 In August 2023 a three-judge US court panel for the District of Columbia Court of Appeals in Washington overruled an SEC decision denying Grayscale Investments permission to launch a bitcoin-focused ETF The courts decision sets the path for a first bitcoin exchange-traded fund in the US121122 In October 2023 ProShares VanEck and Bitwise Asset Management launched the first ETFs tied to the value of Ethereum123 Also regarding spot cryptocurrency ETFs in June 2023 the asset management company BlackRock filed an application with the US Securities and Exchange Commission SEC to launch the first spot Bitcoin ETF with Coinbase as a crypto custodian In January 2024 the SEC approved the creation and trading of 11 spot bitcoin ETFs124125 In November 2023 BlackRock and Fidelity filed applications with the SEC to launch the first spot Ethereum ETFs126 History of Gold ETFs The first gold exchange-traded product was Central Fund of Canada a closed-end fund founded in 1961 It amended its articles of incorporation in 1983 to provide investors with a product for ownership of gold and silver bullion It has been listed on the Toronto Stock Exchange since 1966 and the American Stock Exchange since 1986127 The idea of a gold ETF was first conceptualized by Benchmark Asset Management Company Private Ltd in India which filed a proposal with the Securities and Exchange Board of India in May 2002 In March 2007 after delays in obtaining regulatory approval128 The first gold exchange-traded fund was Gold Bullion Securities launched on the ASX in 2003 and the first silver exchange-traded fund was iShares Silver Trust launched on the NYSE in 2006 SPDR Gold Shares a commodity ETF is in the top 10 largest ETFs by assets under management129 Effects on price stability Purchases and sales of commodities by ETFs can significantly affect the price of such commodities130131 Per the International Monetary Fund some market participants believe the growing popularity of exchange-traded funds ETFs may have contributed to equity price appreciation in some emerging economies and warn that leverage embedded in ETFs could pose financial stability risks if equity prices were to decline for a protracted period50 ETFs can be and have been used to manipulate market prices such as in conjunction with short selling that contributed to the United States bear market of 2007–2009132 New regulations to force ETFs to be able to manage systemic stresses were put in place following the 2010 flash crash when prices of ETFs and other stocks and options became volatile with trading markets spiking and bids falling as low as a penny a share 133 in what the Commodity Futures Trading Commission CFTC investigation described as one of the most turbulent periods in the history of financial markets134135 These regulations proved inadequate to protect investors in the August 24 2015 flash crash133 when the price of many ETFs appeared to come unhinged from their underlying value ETFs were consequently put under even greater scrutiny by regulators and investors133 Analysts at Morningstar Inc claimed in December 2015 that ETFs are a digital-age technology governed by Depression-era legislation133 Perception and adoption of ETFs in the European market The first European ETF came on the market in 2000 and the European ETF market has seen tremendous growth since At the end of March 2019 the asset under management in the European industry stood at €760bn compared with an amount of €100bn at the end of 2008136 The market share of ETFs has increased significantly in recent years At the end of March 2019 ETFs accounted for 86 of total AUM in investment funds in Europe up from 55 five years earlier136 The use of ETFs has also evolved over time as shown by regular observations of investment professionals’ practices in Europe137 EDHEC surveys show an increasing propagation of ETF adoption over the years especially for traditional asset classes While ETFs are now used across a wide spectrum of asset classes in 2019 the main use is currently in the area of equities and sectors for 91 45 in 2006 138 and 83 of the survey respondents respectively This is likely to be linked to the popularity of indexing in these asset classes as well as to the fact that equity indices and sector indices are based on highly liquid instruments which makes it straightforward to create ETFs on such underlying securities The other asset classes for which a large share of investors declare using ETFs are commodities and corporate bonds 68 for them both to be compared with 6 and 15 in 2006 respectively smart beta-factor investing and government bonds 66 for them both to be compared with 13 for government bonds in 2006 Investors have a high rate of satisfaction with ETFs especially for traditional asset classes In 2019 we observed 95 satisfaction for both equities and government bond assets The role of ETFs in the asset allocation process Over the years EDHEC survey results have consistently indicated that ETFs are used as part of a truly passive investment approach mainly for long-term buy-and-hold investment rather than tactical allocation However over the past three years the two approaches have gradually become more balanced and in 2019 European investment professionals declared that their use of ETFs for tactical allocation is actually greater than for long-term positions 53 and 51 respectively ETFs which originally replicated broad market indices are now available in a wide variety of asset classes and a multitude of market sub-segments sectors styles etc If gaining broad market exposure remains the main focus of ETFs for 73 of users in 2019 52 of respondents will use ETFs to obtain specific sub-segment exposure The diversity of ETFs increases the possibilities of using ETFs for tactical allocation Investors can easily increase or decrease their portfolio exposure to a specific style sector or factor at a lower cost with ETFs The more volatile the markets are the more interesting it is to use low-cost instruments for tactical allocation especially since cost is a major criterion for selecting an ETF provider for 88 of respondents Expectations for ETF future developments in Europe Despite the high current adoption rate of ETFs and the already high maturity of this market a high percentage of investors 46 still plan to increase their use of ETFs in the future according to the EDHEC 2019 survey responses Investors are planning to increase their ETF allocation to replace active managers 71 of respondents in 2019 but they are also seeking to replace other passive investing products through ETFs 42 of respondents in 2019 Lowering costs is the main motivation for increasing the use of ETFs for 74 of investors Investors are especially demanding further developments of ETF products in the areas of ethical socially responsible investing and smart beta equityclarification needed and factor indicesclarification needed In 2018 ESG ETFs enjoyed growth of 50 reaching €995bn with the launch of 36 new products compared to just 15 in 2017136 However 31 of the EDHEC 2019 survey respondents still require additional ETF products based on sustainable investment which appears to be their top concern Investors are also demanding ETFs related to advanced forms of equity indices namely those based on multi-factor and smart beta indices 30 and 28 of respondents respectively and 45 of respondents would like to see further developments in at least one category related to smart beta equity or factor indices smart beta indices single-factor indices and multi-factor indices Consistent with the desire to use ETFs for passive exposure to broad market indices only 19 of respondents show any interest in the future development of actively managed equity ETFs Editor’s note We are often approached by other businesses with special offers for our readers. While many don’t make the cut, this message is one we believe deserves your consideration. [Signature] This offer is brought to you by ETFAlerts. If you would like to unsubscribe from receiving offers [click here](. Email sent by Finance and Investing Traffic, LLC, owner and operator of ETF-Alerts. Contact us by sending an email to support@etf-alerts.com. You will receive a response within 24 hours. To make sure you don't miss any of our contents, be sure to [whitelist us](. [  [Privacy Policy]  Privacy Policy Â]( [  [Terms & Conditions]  Terms & Conditions Â]( [  [About Us]  About Us Â]( 221 W 9th St # Wilmington, DE 19801 Copyright © 2021-2024 [ETF-Alerts](. All Rights Reserved. [  [Unsubscribe]  Unsubscribe Â](  

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