How ETFs work

Synopsis

Exchange-traded funds (ETFs) are currently the investment vehicle of choice, allowing investors to buy and sell a wide range of assets throughout the trading day at updated prices. Unlike mutual funds, ETFs are cheaper and provide diversification by capturing the returns of entire indices, such as the S&P 500. They enable retail investors to access asset classes previously out of reach, like gold through gold ETFs. ETFs can track specific investing ideas, including High dividend stocks and the growing Emerging Market middle class. Traditional ETFs own shares and trade derivatives to reflect index movements, while synthetic ETFs are backed by notes underwritten by major banks. This introduces risks, as investors face potential losses if the index Falls or if the counterparty fails. Underwriters must trade Fast and Furious to maintain the connection between ETF share prices and the indices they track, a mechanism that has yet to be tested in a crisis.