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What is an Exchange-Traded Fund or ETF, Why is it important? Classiarius Explains

What is an Exchange-Traded Fund or ETF, Why is it important? Guide

ETFs allow investors to diversify into a sector or industry with only one transaction or investment.

The ETF or exchange-traded fund is a marketable security that mirrors or tracks an index, commodity or basket of assets. ETFs do look like mutual funds but the ETF trades on an exchange, like common stock. So the priceo ETFs will change as they are bought and sold – again the exchange traded factor is key. And note that ETFs tend to have high daily volume and lower exhange fees than mutual fund shares, making them easy to use, thus more attractive to investors.

Most ETFs track stock indexes, but some track commodities and currencies. When an ETF is constructed, it tracks or mirrors the trading of the securities it is designed to follow. Lower costs for trading and easy use of ETFs have contributed to their popularity but note that some ETFs are too concentrated in scope and can be risky.

There are ETFs that track the S&P 500, the Russell 2000, and individual industries such as oil and energy. Also baskets of gold shares and silver. There is now more evidence that ETFs played a role in market flash-crashes and instability. Market sell-offs in May 2010, August 2015 and February 2018 all had high volume of ETFs as fuel for the accelerated market fall – meaning ETFs can be driven through markets at shockingly fast rates.

Currently the volume of assets managed by global Exchange Traded Funds is 4.46 trillion US dollars, while the number of ETFs in the US is now 1,707 that range from stocks, to commodities to precious metals. This market continues to grow and with pressure on cost cutting for investors, they will continue to be popular.

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Disclaimer: We do not provide investment advice or strategies, this article is not intended as such but only to provide you the reader with information. Please conduct your own research before any investment of any kind.

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