Exchange-traded fund
[1][2][3] ETFs own financial assets such as stocks, bonds, currencies, debts, futures contracts, and/or commodities such as gold bars.
An ETF generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value, although deviations can occur.
ETFs are also more transparent since their holdings are generally published online daily and, in the United States, are more tax efficient than mutual funds.
[15] 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 redemptions.
[27] 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 issues.
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 ETFs.
[40] Other indexes on which ETFs are based focus on specific niche areas, such as sustainable energy or environmental, social and corporate governance.
These types of set-ups are not allowed under the European guidelines, Undertakings for Collective Investment in Transferable Securities Directive 2009 (UCITS).
The ETFs may then be at risk from people who might engage in front running since the portfolio reports can reveal the manager's trading strategy.
[61][62] Research reveals the subjective nature of defining thematic investments, such as AI-themed ETFs, often caused by opaque selection criteria, proposing a data-driven methodology using corporate disclosures to improve transparency.
[67][68] Commodity ETFs are generally structured as exchange-traded grantor trusts, which gives a direct interest in a fixed portfolio.
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 roll.
Investors can profit from the foreign exchange spot change, while receiving local institutional interest rates, and a collateral yield.
[80][81][82][83][84] To achieve these results, the issuers use various financial engineering techniques, including equity swaps, derivatives, futures contracts, and rebalancing, and re-indexing.
[93][94] Buffer funds allow investors to invest in cryptocurrency while offering downside protection in exchange for capped upside or a portion of gains.
[98][99][100] 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 stocks.
[102] Nathan Most and Steven Bloom, under the direction of Ivers Riley, and with the assistance of Kathleen Moriarty,[103] designed and developed Standard & Poor's Depositary Receipts (NYSE Arca: SPY), which were introduced in January 1993.
WEBS originally tracked 17 MSCI country indices managed by the funds' index provider, Morgan Stanley.
[114][115] In 2007, Deutsche Bank's db x-trackers launched the EONIA Total Return Index ETF in Frankfurt tracking the Euro.
In November 2009, ETF Securities launched the world's largest FX platform tracking the MSFXSM Index covering 18 long or short USD ETC vs. single G10 currencies.
in June, the asset management company BlackRock filed an application with the U.S. Securities and Exchange Commission (SEC) to launch the first spot bitcoin ETF, with Coinbase as a crypto custodian.
However, the firms could not sell or pass on such dust because that could imperil an ETF’s legal status and force investors to file complex tax paperwork.
[140][141] 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 period.
[142] 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 [143] in what the Commodity Futures Trading Commission (CFTC) investigation described as one of the most turbulent periods in the history of financial markets.
[144][145] These regulations proved inadequate to protect investors in the August 24, 2015, flash crash,[143] "when the price of many ETFs appeared to come unhinged from their underlying value".
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 [148]) and 83% of the survey respondents, respectively.
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).
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.
[146][149] However, 31% of the EDHEC 2019 survey respondents still require additional ETF products based on sustainable investment, which appears to be their top concern.
