Exchange-Traded Fund (ETF)

An Exchange-Traded Fund (ETF) is a collective investment scheme that can be used to create investment portfolios (that support investment strategy tasks).

• Context:
  • It can typically be purchased or sold on Stock Exchange during trading hours at market prices.
  • It can typically hold investment assets such as stocks, bonds, currencys, futures contracts, and commoditys.
  • It can typically track financial market index using index replication methodologys and index weighting approaches.
  • It can typically operate with arbitrage mechanism designed to keep ETF trading price close to ETF net asset value.
  • It can typically disclose ETF holdings daily on ETF issuer website for ETF transparency.
  • It can typically feature ETF fee structure with ETF expense ratios ranging from 0.03% to over 1% of invested amount.
  • It can typically divide ETF ownership into ETF shares held by ETF shareholders.
  • It can typically distribute ETF profits such as ETF interest or ETF dividends to ETF shareholders.
  • ...
  • It can often provide ETF tax efficiency through ETF creation/redemption mechanisms.
  • It can often offer ETF liquidity throughout trading day unlike end-of-day mutual fund.
  • It can often implement ETF passive investment approaches through index tracking.
  • It can often enable ETF portfolio diversification across market sectors, geographic regions, or asset classes.
  • It can often support ETF trading flexibility including ETF limit orders, ETF stop orders, and ETF short selling.
  • ...
  • It can range from being a Broad-Market ETF to being a Specialized ETF, depending on its ETF market coverage.
  • It can range from being a Passive Index ETF to being an Active ETF, depending on its ETF management approach.
  • It can range from being a Physical Replication ETF to being a Synthetic ETF, depending on its ETF replication method.
  • It can range from being a Low-Cost ETF to being a Premium ETF, depending on its ETF expense ratio.
  • ...
  • It can integrate with Portfolio Management System for ETF allocation.
  • It can support Investment Strategy for ETF implementation.
  • It can connect to Risk Management Platform for ETF risk assessment.
  • It can be accessed through Brokerage Account for ETF investment.
  • ...
• Examples:
  • ETF Types, such as:
    • Index ETFs, such as:
      • Equity Index ETFs, such as:
        • Large-Cap ETFs, such as SPDR S&P 500 ETF (SPY) tracking the S&P 500 Index for large-cap equity exposure.
        • Mid-Cap ETFs, such as iShares Core S&P Mid-Cap ETF (IJH) tracking the S&P MidCap 400 Index for mid-cap equity exposure.
        • Small-Cap ETFs, such as Vanguard Small-Cap ETF (VB) tracking the CRSP US Small Cap Index for small-cap equity exposure.
        • Total Market ETFs, such as Vanguard Total Stock Market ETF (VTI) tracking the CRSP US Total Market Index for broad market exposure.
        • Growth ETFs, such as Vanguard S&P 500 Growth ETF (VOOG) for growth equity exposure.
        • Value ETFs, such as iShares Russell 1000 Value ETF (IWD) for value equity exposure.
      • Bond Index ETFs, such as:
        • Aggregate Bond ETFs, such as iShares Core U.S. Aggregate Bond ETF (AGG) for broad bond market exposure.
        • Treasury Bond ETFs, such as iShares 7-10 Year Treasury Bond ETF (IEF) for treasury bond exposure.
        • Corporate Bond ETFs, such as Vanguard Intermediate-Term Corporate Bond ETF (VCIT) for corporate bond exposure.
      • International Index ETFs, such as:
        • Global Index ETFs tracking global market indexes for global market exposure.
        • Emerging Market ETFs tracking emerging market indexes for emerging market exposure.
        • Developed Market ETFs tracking developed market indexes for developed market exposure.
    • Sector ETFs, such as:
      • Technology Sector ETFs for technology sector exposure.
      • Financial Sector ETFs for financial sector exposure.
      • Healthcare Sector ETFs for healthcare sector exposure.
    • Commodity ETFs, such as:
      • Gold ETFs tracking gold price for gold exposure.
      • Oil ETFs tracking oil price for oil exposure.
      • Agricultural Commodity ETFs tracking agricultural commodity prices for agricultural commodity exposure.
    • Currency ETFs tracking currency exchange rates for currency exposure.
    • Specialty ETFs, such as:
      • Dividend ETFs focusing on dividend-paying stocks for dividend income.
      • Factor ETFs targeting specific investment factors like quality, momentum, or low volatility.
      • Thematic ETFs focusing on specific investment themes like clean energy or cybersecurity.
  • ETF Providers, such as:
    • BlackRock iShares with 35% U.S. ETF market share.
    • Vanguard Group with 28% U.S. ETF market share.
    • State Street Global Advisors with 14% U.S. ETF market share.
    • Invesco with 5% U.S. ETF market share.
    • Charles Schwab Corporation with 4% U.S. ETF market share.
  • ETF Structures, such as:
    • Physical ETFs directly holding underlying securitys.
    • Synthetic ETFs using swap agreements with counterparty.
    • Optimized Sampling ETFs holding representative basket of securities.
  • ...
• Counter-Examples:
  • Mutual Funds, which cannot be traded on stock exchanges and are typically priced at end-of-day net asset value.
  • Closed-End Funds, which have fixed share count and often trade at significant premium or discount to net asset value.
  • Exchange-Traded Notes, which are debt instruments rather than fund structures.
  • Individual Stock Investments, which lack diversification across multiple securities.
  • Fixed Income Investments like individual bonds, which lack ETF trading flexibility and ETF creation/redemption mechanisms.
• See: Investment Fund, Exchange-Traded Product, Index Fund, Stock Market Index, Passive Investment, Portfolio Diversification.

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References

2022

• (Wikipedia, 2022) ⇒ https://en.wikipedia.org/wiki/Exchange-traded_fund Retrieved:2022-8-31.
  • An exchange-traded fund (ETF) is a type of investment fund and exchange-traded product, i.e. they are traded on stock exchanges. 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 day's end. An ETF holds assets such as stocks, bonds, currencies, futures contracts, and/or commodities such as gold bars, and generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value, although deviations can occasionally occur. Most ETFs are index funds: that is, they hold the same securities in the same proportions as a certain stock market index or bond market index. The most popular ETFs in the U.S. replicate the S&P 500, the total market index, the NASDAQ-100 index, the price of gold, the "growth" stocks in the Russell 1000 Index, or the index of the largest technology companies. With the exception of non-transparent actively managed ETFs, in most cases, the list of stocks that each ETF owns, as well as their weightings, is posted daily on the website of the issuer. The largest ETFs have annual fees of 0.03% of the amount invested, or even lower, although specialty ETFs can have annual fees well in excess of 1% of the amount invested. These fees are paid to the ETF issuer out of dividends received from the underlying holdings or from selling assets.

    An ETF divides ownership of itself into shares that are held by shareholders. The details of the structure (such as a corporation or trust) will vary by country, and even within one country there may be multiple possible structures. The shareholders indirectly own the assets of the fund, and they will typically get annual reports. Shareholders are entitled to a share of the profits, such as interest or dividends, and they would be entitled to any residual value if the fund undergoes liquidation.

    ETFs may be attractive as investments because of their low costs, tax efficiency, and tradability.

    As of August 2021, $9 trillion was invested in ETFs globally, including $6.6 trillion invested in the U.S.

    In the U.S., the largest ETF issuers are BlackRock iShares with a 35% market share, The Vanguard Group with a 28% market share, State Street Global Advisors with a 14% market share, Invesco with a 5% market share, and Charles Schwab Corporation with a 4% market share.

    Closed-end funds are not considered to be ETFs, even though they are funds and are traded on an exchange. Exchange-traded notes are debt instruments that are not exchange-traded funds.

2021

• (Investopedia, 2021) ⇒ https://www.investopedia.com/terms/e/etf.asp
  • QUOTE: ... An exchange-traded fund (ETF) is a type of pooled investment security that operates much like a mutual fund. Typically, ETFs will track a particular index, sector, commodity, or other assets, but unlike mutual funds, ETFs can be purchased or sold on a stock exchange the same way that a regular stock can. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies.

    The first ETF was the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index, and which remains an actively traded ETF today. ...

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