ETF (Exchange Exchange Traded Fund) is an investment fund listed on the stock exchange, simulating the fluctuations of a group of assets such as stocks, bonds, commodities or crypto.
ETFs allow investors with small Capital to access many types of assets at the same time, save costs, reduce risks by diversifying the portfolio and easily trade like regular stocks.
- ETF is a listed investment fund that simulates the fluctuations of a diversified portfolio of assets.
- ETFs help retail investors save costs, diversify portfolios and trade conveniently.
- The global ETF market exploded, with Capital reaching nearly $10 trillion by the end of 2021.
What is ETF?
An ETF is a listed investment fund that aims to mimic the movements of an index or a portfolio of assets. Investors only need to buy fund certificates to own a portion of the portfolio instead of buying each asset individually.
This product provides investors with easy access to the stock, bond, commodity or crypto markets.
For example, the SPX ETF tracks the S&P500 index, the BOND ETF focuses on bonds, or the DBC ETF developed by Invesco tracks the commodities market.
Where does the demand for ETFs come from?
The demand for investment and accumulation of assets is always high, especially in the stock market. However, Capital barriers, trading regulations and lack of knowledge make it difficult for many investors to access.
ETFs were born as a solution to diversify portfolios at low cost, without requiring in-depth research. Thanks to being listed on the stock exchange, ETFs are easy to buy and sell, suitable even for small individual investors.
“ETFs democratize investing, allowing small investors access to strategies that were previously only available to large institutions.”
— Larry Fink, CEO BlackRock, 2021
How do ETFs work?
The ETF model consists of three stages: creation, primary trading, and secondary trading. The issuing company designs the fund, allocates assets, and issues ETF certificates.
Large institutions then enter the primary market by exchanging their portfolios of securities for ETF certificates. Finally, individual investors trade in the secondary market.
Market makers engage in arbitrage , ensuring that the ETF price is close to the underlying asset value and increasing liquidation for the fund.
What is the development history of ETF?
The first ETF appeared in 1989 with Index Participation Shares for the S&P500, but was folded into a Futures Contract.
The breakthrough was the Toronto 35 Index Participation Units launched in 1990 in Canada. By 1993, State Street's SPDR S&P500 ETF (SPY) was launched, becoming the world's most famous ETF.
Since then, the ETF industry has exploded. Barclays joined the ETF development in 1996, followed by Vanguard in 2001. As of 2020, there are more than 7,100 ETFs globally from more than 160 issuers.
“ETFs have changed the way investors access the markets, turning complex strategies into accessible products.”
— Investopedia, A Brief History of ETFs, 2020
How are ETFs classified?
There are two ways to classify: by management method and by asset allocation. Passive ETFs track an index, have low costs but are less flexible. Active ETFs are more flexible, seek superior returns but have high management fees.
By asset class, there are stock ETFs (like SPY), bond ETFs, commodity ETFs, sector ETFs, Derivative ETFs, and hybrid ETFs. In Vietnam, many companies have issued ETFs, making them easily accessible to investors.
What benefits do ETFs bring to the market?
ETFs help increase liquidation through arbitrage and trading of assets in the portfolio. In addition, ETFs contribute to promoting long-term growth by simplifying financial products, making them accessible to a wide range of investors.
By the end of 2021, global ETF Capital reached 9.94 trillion USD, with an average growth rate of 25.6%/year in the period 2002–2021 (ETFGI, 2022).
“ETFs have become a major driving force behind the growth of global Capital markets.”
— ETFGI Report, 2022
Should you invest in ETFs?
Passive ETFs typically perform well over the long term. For example, the S&P 500 has returned 5.45% annually from 1928–2022 and 7.6% annually over the past 30 years.
Wall Street research shows that only 6.7% of active funds beat the S&P 500 from 1970–2006.
Low costs, portfolio diversification and stable performance make ETFs an optimal choice for long-term investors, especially those with little time for in-depth research.
How to choose a suitable ETF?
First, investors need to XEM the basic factors: management costs, minimum Capital , investment philosophy, transparency and liquidation. These are the factors that determine the actual profit and safety level.
Next, it is necessary to evaluate the profit-risk index: past fund performance, actual costs, underlying asset prospects and personal risk tolerance. From there, compare with investment objectives to choose the appropriate ETF.
“Choosing an ETF should not only be based on past performance, but also on how it fits an investor's risk appetite and long-term strategy.”
— Vanguard Research, 2021
Frequently Asked Questions
Are ETFs risky?
Yes. Despite diversification, ETFs are still exposed to market and underlying asset volatility.
How is an ETF different from an open-end fund?
ETFs trade on the exchange like stocks, while open-end funds trade directly with the fund management company, not through the exchange.
Is the cost of investing in ETFs high?
Passive ETF costs are typically very low, much lower than active funds.
Are ETFs suitable for new investors?
Yes. ETFs are simple, transparent, low cost and offer diversification, making them suitable for beginners.
Can I withdraw Capital from an ETF at any time?
Yes. Since ETFs are listed, investors can sell them back on the exchange at any time during trading hours.
