Insights


What is an ETF?

  • ETFs are designed to track the performance of a market or sector index while offering the full diversification available.
  • They can be traded on the stock exchange, any time of the trading day, at prevailing market prices.


What Are ETFs?

An ETF (exchange traded fund) is a collection of securities held in a fund designed either to track the performance of the whole market, or a broad segment, or sector of the market. The shares of ETFs trade on the stock exchange.

Many ETFs are designed to track the performance of major global index providers like the S&P, FTSE, and MSCI, among many others.

There are also ETFs that track specific segments of the market, such as small-caps, mid-caps, large-caps, GICS sectors, emerging markets, and so on, and ETFs that follow commodities, like Gold.

How Do They Work?

An ETF is similar to an unlisted index managed fund, or unit trust, in that it pools investments to purchase a diversified index asset base. However, the ETF adds the benefit of being traded on the stock exchange so its shareholders can easily trade it at any time of the trading day at prevailing market prices. Unlisted funds cannot offer this and are very limited in how their shares can be purchased and sold.

Like most managed funds, most ETFs invest in the physical assets they are tracking, however, it is important for investors to distinguish when ETFs do not use a physical backing strategy.

With ETFs, investors also benefit from transparent pricing that comes from liquid, active trading on the stock exchange. Market
Makers ensure that there is always a bid (buy) and offer (sell) price in the market, so investors can always trade. As with stocks, ETF investors can place stop loss and limit orders on ETFs. ETF shares can even be bought on margin and sold short, subject to your broker’s terms and conditions. These features are largely unavailable with unlisted index funds.

Because of their reach, listing features and flexibility, ETFs can combine these exchange trading benefits with access to thousands of domestic and international indexes, as well as specific sectors or industries (e.g, utilities, technology, healthcare or gold). For these reasons, ETFs have grown exponentially since State Street launched the first US-listed ETF in 1993 —see the chart, Global ETF Growth Over The Last 22 Years—with over $4 trillion in assets at the end of 2018.

Global ETF Growth

 

 

Comparing ETFs to Stocks and Managed Funds

 

ETFs offer the advantages of trading throughout the day, with flexible trading options, and no minimum investment requirement outside of the minimum required by brokers to execute a trade.


Important Information

This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

 



The Potential Benefits of ETFs


SPDR ETFs offer access to numerous markets, with the benefit of physical asset-backing, ease of trading, and cost efficiency — managed by one of the world’s most trusted global asset managers, State Street Global Advisors.