Why ETF?


An ETF, or exchange-traded fund (ETF) is an investment fund traded on stock exchanges, similar to stocks. It holds assets such as bonds stocks or commodities and during the trading day it trades at about the same price as the net asset value of its underlying assets. ETFs attract investors because they have stock-like features, are more tax efficient and also have lower costs. Most ETFs track an index, like the MSCI EAFE or the S&P 500 and are the most popular kind of exchange-traded product.

Directly purchasing or selling ETF shares from or to the fund manager is only done by the so-called authorized participants (typically, large institutional investors).  Even then, this only occurs in large blocks (tens of thousands) of ETF shares (known as 'creation units'), which are usually exchanged in-kind with baskets of the underlying securities. These large, institutional investors might want to invest in the ETF shares for the long-term, but typically they act as market makers on the open market. To do this they use their ability to exchange creation units with their underlying securities to assist in ensuring that the intraday market price approximates the underlying assets' net value as well as to providing liquidity of the ETF share. Other investors, such as individuals using a retail broker, trade ETF shares on this secondary market.

A nice feature of an ETF is that it combines the tradability feature of a closed-end fund, which trades throughout the trading day at prices that may be more or less than its net asset value, with the valuation feature of a mutual fund or unit investment trust, which can be bought or sold at the end of each trading day for its net asset value. A Closed-end fund is not considered to be an “ETFs”, despite the fact that it is a fund and it is traded on an exchange.

In the US, ETFs have been available since 1993 and in Europe they have been around since 1999. In 1993, a collaboration between BGI, MSCI and a small independent third party Distribution firm called Funds Distributor, Inc. produced the first country-specific ETFs.  Over time, this product evolved into the iShares brand widely known around the world.

Traditionally, ETFs have been index funds, but the U.S. Securities and Exchange Commission began to authorize the creation of actively managed ETFs in 2008. You can download a free copy of our ETF analysis and trading software here

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