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Anexchange-traded fund (ETF) is a type ofinvestment fund that is also anexchange-traded product; i.e., it is bought and sold onstock exchanges.[1][2][3] ETFs own financial assets such asstocks,bonds,currencies,debts,futures contracts, and/orcommodities such asgold bars. Many ETFs provide some level ofdiversification compared to owning an individual stock.
An ETF divides ownership of itself intoshares that are held by shareholders. Depending on the country, the legal structure of an ETF can be acorporation,trust, open-end managementinvestment company, orunit investment trust.[4][5]Shareholders indirectly own the assets of the fund and are entitled to a share of the profits, such asinterest ordividends, and would be entitled to any residual value if the fund undergoesliquidation. They also receive annual reports. An ETF generally operates with anarbitrage mechanism designed to keep it trading close to itsnet asset value, although deviations can occur.[6]
The largest ETFs, which passively track stock market indices, have annualexpense ratios as low as 0.03% of the amount invested, although specialty ETFs can have annual fees of 1% or more of the amount invested. These fees are paid to the ETF issuer out of dividends received from the underlying holdings or from the sale of assets.[7]
In the United States, there is $5.4 trillion invested in equity ETFs and $1.4 trillion invested in fixed-income ETFs. In Europe, there is $1.0 trillion invested in equity ETFs and $0.4 trillion invested in fixed-income ETFs. In Asia, there is $0.9 trillion invested in equity ETFs and $0.1 trillion invested in fixed-income ETFs. In the first quarter of 2023, trading in ETFs accounted for 32% of the total dollar volume of stock market trading in the US, 11% of trading volume in Europe, and 13% of trading volume in Asia.[8]
In the US, the largest ETF issuers areBlackRockiShares with a 34% market share,Vanguard with a 29% market share,State Street Global Advisors with a 14% market share,Invesco with a 5% market share, andCharles Schwab with a 4% market share.[9]
ETFs are regulated by governmental bodies (such as theSEC and theCFTC in the United States) and are subject to securities laws (such as theInvestment Company Act of 1940 and theSecurities Exchange Act of 1934 in the United States).
Closed-end funds are not considered to be ETFs; even though they are funds and are traded on an exchange they do not change the number of shares they have issued, unlike an ETF.Exchange-traded notes are debt instruments that are not exchange-traded funds.
ETFs are similar in many ways tomutual 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. ETFs are also more transparent since their holdings are generally published online daily and, in the United States, are more tax efficient than mutual funds.[10][11][12] Unlike mutual funds, ETFs trade on astock exchange, can be soldshort, can be purchased using funds borrowed from a stockbroker (margin), and can be purchased and sold usinglimit orders, with the buyer or seller aware of the price per share in advance.[13][14]
Both ETFs and mutual funds charge annualexpense ratios that range from 0.02% of the investment value to upwards of 1% of the investment value. Mutual funds generally have higher annual fees since they have higher marketing, distribution and accounting expenses (12b-1 fees).[15] ETFs are also generally cheaper to operate since, unlikemutual funds, they do not have to buy and sell securities and maintain cash reserves to accommodate shareholder purchases and redemptions.[16][17][18][19]
Stockbrokers may charge different commissions, if any, for the purchase and sale of ETFs and mutual funds. In addition, sales of ETFs in the United States are subject to transaction fees that the national securities exchanges must pay to the SEC under section 31 of theSecurities Exchange Act of 1934, which, as of February 2023, is $8 per $1 million in transaction proceeds.[20] Many mutual funds can be bought commission-free from the issuer, although some charge front-end or back-endloads, while ETFs do not have loads at all.[21]
In the United States, ETFs can be more attractive tax-wise than mutual funds for transactions made in taxable accounts. However, there are no tax benefits to ETFs compared to mutual funds in the United Kingdom and Germany.[22][23][24]
In the US, whenever a mutual fund realizes acapital gain that is not balanced by a realized loss (i.e. when the fund sells appreciated shares to meet investor redemptions), its shareholders who hold the fund in taxable accounts often paycapital gains taxes on their share of the gain.[25][26] However, ETF investors generally only realize capital gains when they sell their own shares for a gain.[27]
ETFs offered byVanguard are actually a different share class of its mutual funds and do not stand on their own; however, they generally do not have any adverse tax issues.[28][29][30][31]
ETFs can be bought and sold at current market prices at any time during the trading day, unlikemutual funds, which can only be traded at the end of the trading day.[32] Also unlike mutual funds, investors can execute the same types of trades that they can with a stock, such aslimit orders, which allow investors to specify the price points at which they are willing to trade,stop-loss orders,margin buying,hedging strategies, and there is no minimum investment requirement. ETFs can be traded frequently to hedge risk or implementmarket timing investment strategies, whereas many mutual funds have restrictions on frequent trading.[4][33]
Options, includingput options andcall options, can be written or purchased on most ETFs – which is not possible with mutual funds, allowing investors to implement strategies such ascovered calls on ETFs. There are also several ETFs that implement covered call strategies within the funds.[34][35][36]
Many mutual funds must be held in an account at the issuing firm, while ETFs can be traded via any stockbroker. Some stockbrokers do not allow for automatic recurring investments or trading fractional shares of ETFs, while these are allowed by all mutual fund issuers.[10]
The most popular ETFs such as those tracking theS&P 500 trade tens of millions of shares per day and have strongmarket liquidity, while there are many ETFs that do not trade very often, and thus might be difficult to sell compared to more liquid ETFs. The most active ETFs arevery liquid, with high regular trading volume and tightbid-ask spreads (the gap between buyer and seller's prices), and the price thus fluctuates throughout the day. This is in contrast with mutual funds, where all purchases or sales on a given day are executed at the same price at the end of the trading day.
Issuers are required by regulators to publish the composition of their portfolios on their websites daily, or quarterly in the case of active non-transparent ETFs.[37][38][39]
ETFs are priced continuously throughout the trading day and therefore have price transparency.[40]
Actively managed ETFs includeactive management, whereby the manager executes a specific trading strategy instead of replicating the performance of astock market index. The securities held by such funds are posted on their websites daily, or quarterly in the cases of active non-transparent ETFs. The ETFs may then be at risk from people who might engage infront running since the portfolio reports can reveal the manager's trading strategy. Some actively managed equity ETFs address this problem by trading only weekly or monthly.[41] The largest actively managed ETFs are the JPMorgan Equity Premium Income ETF (NYSE: JEPI), which charges 0.35% in annual fees, JPMorgan Ultra-Short Income ETF (NYSE: JPST), which charges 0.18% in annual fees, and thePimco Enhanced Short Duration ETF (NYSE: MINT), which charges 0.36% in annual fees.[42]
Bond ETFs are exchange-traded funds that invest in bonds.[43] Bond ETFs generally have much moremarket liquidity than individual bonds.[44]
Commodity ETFs invest incommodities such as precious metals, agricultural products, or hydrocarbons such as petroleum and are subject to different regulations than ETFs that own securities.[45][6] Commodity ETFs are generally structured as exchange-traded grantor trusts, which gives a direct interest in a fixed portfolio.SPDR Gold Shares, agold exchange-traded fund, is a grantor trust, and each share represents ownership of one-tenth of an ounce of gold.[46][47] Most commodity ETFs own the physical commodity.SPDR Gold Shares (NYSE Arca: GLD) owns over 40 million ounces of gold in trust,[48]iShares Silver Trust (NYSE Arca: SLV) owns 18,000 tons of silver,[49] Aberdeen Standard Physical Palladium Shares (NYSE Arca: PALL) owns almost 200,000 ounces ofpalladium,[50] and Aberdeen Standard Physical Platinum Shares ETF (NYSE Arca: PPLT) owns over 1.1 million ounces ofplatinum.[51] However, many ETFs such as theUnited States Oil Fund byUnited States Commodity Funds (NYSE Arca: USO) only ownfutures contracts,[52] which may produce quite different results from owning the commodity. In these cases, the funds simply roll thedelivery month of the contracts forward from month to month. This does give exposure to the commodity, but subjects the investor to risks involved in different prices along theterm structure, such as a high cost to roll.[53][54] They can also be index funds tracking commodity indices.
Cryptocurrency ETFs invest in cryptocurrencies such asBitcoin,Ethereum, or a basket of different cryptocurrencies.[55] There are two types of crypto ETFs. Spot crypto ETFs invest directly in cryptocurrencies, tracking their real-time prices, and their share prices will fluctuate with the prices of the cryptocurrencies they hold. On the other hand, future-based crypto ETFs refer to equities that do not invest directly in cryptocurrencies but rather in cryptofutures contracts. These contracts are agreements to buy or sell cryptocurrencies at a predetermined price in the future. As a result, the share prices and price fluctuating trends of funds in these two types could be different, even though they hold identical cryptocurrencies and amounts.[56][57] Buffer funds allow investors to invest in cryptocurrency while offering downside protection in exchange for capped upside or a portion of gains.[58] ETFs offering exposure tomeme coins likeDogecoin and$Trump are in development for launch in 2025.[59]
Currency ETFs enable investors to invest in or short any major currency or a basket of currencies. They are issued byInvesco andDeutsche Bank among others. Investors can profit from theforeign exchange spot change, while receiving local institutional interest rates, and a collateral yield.[60]
Index ETFs areindex funds: that is, they track the performance of an index generally by holding the same securities in the same proportions as a certainstock market index,bond market index or other economicindex. Examples of large Index ETFs include the Vanguard Total Stock Market ETF (NYSE Arca: VTI), which tracks the CRSP U.S. Total Market Index, ETFs that track theS&P 500, which are issued byThe Vanguard Group (VOO),iShares (IVV), andState Street Corporation (SPY), ETFs that track theNASDAQ-100 index (Nasdaq: QQQ), and the iShares Russell 2000 ETF (IWM), which tracks theRussell 2000 Index, entirely composed of companies with smallmarket capitalizations. Other funds track indices of a certain country or include only companies that are not based in the United States; for example, the Vanguard Total International Stock Index ETF (VXUS) tracks the MSCI All Country World ex USA Investable Market Index, the iShares MSCI EAFE Index ETF (EFA) tracks theMSCI EAFE Index, and the iShares MSCI Emerging Markets ETF (EEM) tracks the MSCI Emerging Markets index. Some ETFs track a specific type of company, such as the iShares Russell 1000 Growth ETF (IWF), which tracks the "growth" stocks in theRussell 1000 Index.State Street Corporation has issued ETFs that track the components of theS&P 500 in eachindustry: for example, the Technology Select Sector SPDR Fund (XLK) tracks the components of the S&P 500 that are in thetechnology industry and The Financial Select Sector SPDR Fund, which tracks the components of the S&P 500 that are in thefinancial industry. The iShares Select Dividend ETF replicates an index of high dividend paying stocks.[61] Other indexes on which ETFs are based focus on specific niche areas, such assustainable energy orenvironmental, social and corporate governance.[62] Most index ETFs invest 100% of their assets proportionately in the securities underlying an index, a manner of investing called replication. Some index ETFs such as the Vanguard Total Stock Market Index Fund, which tracks the performance of thousands of underlying securities, use representative sampling, investing 80% to 95% of their assets in the securities of an underlying index and investing the remaining 5% to 20% of their assets in other holdings, such as futures, option and swap contracts, and securities not in the underlying index, that the fund's adviser believes will help the ETF to achieve its investment objective.[63][64][65][66]
Factor ETFs are index funds that useenhanced indexing, which combinesactive management with passive management in an attempt to beat the returns of an index. Factor ETFs tend to have slightly higherexpense ratios andvolatility than strictly passive index ETFs.[67][68][69]Factor investing targets measurable characteristics, which help explain differences in risk and return. Commonly studied equity factors include size,value,momentum,quality, andlow volatility.[70]
Synthetic ETFs, which are common in Europe but rare in the United States, are a type of index ETF that does not own securities but tracks indexes using derivatives and swaps. They have raised concern due to lack of transparency in products and increasing complexity; conflicts of interest; and lack of regulatory compliance.[71][72][73] A synthetic ETF hascounterparty risk, because the counterparty is contractually obligated to match the return on the index. The deal is arranged with collateral posted by the swap counterparty, which arguably could be of dubious quality. These types of set-ups are not allowed under the European guidelines,Undertakings for Collective Investment in Transferable Securities Directive 2009 (UCITS).[74][75] Counterparty risk is also present where the ETF engages insecurities lending or total return swaps.[76] The difference between the performance of an index fund and the index itself is called thetracking error; this difference is usually negative, except duringflash crashes and other periods of extreme market turbulence, for index funds that do not use full replication, and for indices that consist of illiquid assets such ashigh-yield debt.[77][78][4][79][80]
Leveraged ETFs (LETFs) andinverse ETFs use investments inderivatives to seek a daily return that corresponds to a multiple of, or the inverse (opposite) of, the daily performance of an index.[81] For example,Direxion offers leveraged and inverse ETFs that attempt to produce 3x the daily result of either investing in (NYSE Arca: SPXL) orshorting (NYSE Arca: SPXS) theS&P 500.[82][83][84][85][86] To achieve these results, the issuers use variousfinancial engineering techniques, includingequity swaps,derivatives,futures contracts,rebalancing, and re-indexing.[87] The rebalancing and re-indexing of leveraged ETFs may have considerable costs when markets are volatile. Leveraged ETFs effectively increase exposure ahead of a losing session and decrease exposure ahead of a winning session.[87][88] This is calledvolatility drag orvolatility tax. Therebalancing problem is that the fund manager incurs trading losses because he needs to buy when the index goes up and sell when the index goes down in order to maintain a fixed leverage ratio.[89][90][91][92][93] Leverage possesses a dual nature, as it has the potential to result in substantial profits, yet it also carries the risk of substantial losses.[94]
Thematic ETFs are ETFs, including both index ETFs and actively managed ETFs, that focus on a theme such as disruptive technologies,climate change, shifting consumer behaviors,cloud computing,robotics,electric vehicles, thegig economy,e-commerce, orclean energy.[95][96] Research reveals the subjective nature of defining thematic investments, such as AI-themed ETFs, often caused by opaque selection criteria, proposing a data-driven methodology using corporate disclosures to improve transparency.[97] The SEC recently charged two investment advisors with "AI washing" for exaggerating their AI involvement to exploit market enthusiasm.[98]
ETF shares are created and redeemed when largebroker-dealers called authorized participants (APs) act asmarket makers and purchase and redeem ETF shares directly from the ETF issuer in large blocks, generally 50,000 shares, called creation units. Purchases and redemptions of the creation units are generallyin kind, with the AP contributing or receivingsecurities of the same type and proportion held by the ETF; the lists of ETF holdings are published online.[6]
The ability to purchase and redeem creation units gives ETFs anarbitrage mechanism intended to minimize the potential deviation between the market price and thenet asset value of ETF shares. APs providemarket liquidity for the ETF shares and help ensure that their intraday market price approximates thenet asset value of the underlying assets.[6] Other investors, such as individuals using a retail broker, trade ETF shares on thesecondary market.
If there is strong investor demand for an ETF, its share price will temporarily rise above its net asset value per share, giving arbitrageurs an incentive to purchase additional creation units from the ETF issuer and sell the component ETF shares in the open market. The additional supply of ETF shares reduces the market price per share, generally eliminating thepremium over net asset value. A similar process applies when there is weak demand for an ETF: its shares trade at a discount from their net asset value.
When new shares of an ETF are created due to increased demand, this is referred to as ETF inflows. When ETF shares are converted into the component securities, this is referred to as ETF outflow.[99]
ETFs are dependent on the efficacy of the arbitrage mechanism in order for their share price to track net asset value.
ETFs had their genesis in 1989 with Index Participation Shares (IPS), anS&P 500 proxy that traded on theAmerican Stock Exchange and thePhiladelphia Stock Exchange. This product was short-lived after a lawsuit by theChicago Mercantile Exchange was successful in stopping sales in the United States.[100][101][102] The argument against the IPS approach was that it resembled a futures contract because the investments held an index, rather than holding the actual underlying stocks.[103]
In 1990, a similar product, Toronto Index Participation Units, which tracked the TSE 35 and later the TSE 100 indices, started trading on theToronto Stock Exchange (TSE) in 1990. The popularity of these products led theAmerican Stock Exchange to try to develop something that would satisfy regulations by theU.S. Securities and Exchange Commission.[104]
Nathan Most and Steven Bloom, under the direction of Ivers Riley, and with the assistance of Kathleen Moriarty,[105] designed and developedStandard & Poor's Depositary Receipts (NYSE Arca: SPY), which were introduced in January 1993.[106][107][108] Known as SPDRs or "Spiders", the fund became the largest ETF in the world. In May 1995,State Street Global Advisors introduced theS&P 400 MidCap SPDRs (NYSE Arca: MDY).
It is a frequent topic in the financial press that ETFs have a quick growth. These popular funds, with assets more than doubling each year since 1995 (as of 2001), have been warmly embraced by most advocates of low–costindex funds.Vanguard is the leading advocate ofindex funds.[109]
Barclays, in conjunction withMSCI and Funds Distributor Inc., entered the market in 1996 with World Equity Benchmark Shares (WEBS), which becameiShares MSCI Index Fund Shares. WEBS originally tracked 17MSCI country indices managed by the funds' index provider,Morgan Stanley. WEBS were particularly innovative because they gave casual investors easy access to foreign markets. While SPDRs were organized asunit investment trusts, WEBS were set up as amutual fund, the first of their kind.[110][111]
In 1998,State Street Global Advisors introduced "SectorSpiders", separate ETFs for each of the sectors of theS&P 500.[112] Also in 1998, the "Dow Diamonds" (NYSE Arca: DIA) were introduced, tracking theDow Jones Industrial Average. In 1999, the influential "cubes" was launched, with the goal of replicating the price movement of theNASDAQ-100 – originallyQQQQ but laterNasdaq: QQQ.
TheiShares line was launched in early 2000. By 2005, it had a 44% market share of ETFassets under management.[113] Barclays Global Investors was sold toBlackRock in 2009.
In 2001,The Vanguard Group entered the market by launching the Vanguard Total Stock Market ETF (NYSE Arca: VTI), which owns every publicly traded stock in the United States.[114] Some of Vanguard's ETFs are a share class of an existing mutual fund.
iShares issued the first bond funds in July 2002: iShares IBoxx $ Invest Grade Corp Bond Fund (NYSE Arca: LQD), which ownscorporate bonds, and aTIPS fund.[115] In 2007, iShares introduced an ETF that ownshigh-yield debt and an ETF that ownsmunicipal bonds andState Street Global Advisors andThe Vanguard Group also issued bond ETFs.
In December 2005, Rydex (nowInvesco) launched the first currency ETF, the Euro Currency Trust (NYSE Arca: FXE), which tracked the value of theEuro.[116][117] In 2007,Deutsche Bank's db x-trackers launched the EONIA Total Return Index ETF in Frankfurt tracking theEuro. In 2008, it launched the Sterling Money Market ETF (LSE: XGBP) and US Dollar Money Market ETF (LSE: XUSD) in London. In November 2009,ETF Securities launched the world's largest FX platform tracking the MSFXSM Index covering 18 long or short USD ETC vs. single G10 currencies.[118]
The first leveraged ETF was issued byProShares in 2006.[81]
In 2008, the SEC authorized the creation of ETFs that useactive management strategies.[6]Bear Stearns launched the first actively managed ETF, the Current Yield ETF (NYSE Arca: YYY), which began trading on theAmerican Stock Exchange on March 25, 2008.[119][120][121]
In December 2014,assets under management by U.S. ETFs reached $2 trillion.[122] By November 2019, assets under management by U.S. ETFs reached $4 trillion.[123][124][125] Assets under management by U.S. ETFs grew to $5.5 trillion by January 2021.[126]
In August 2023, a three-judge US court panel for theDistrict of Columbia Court of Appeals in Washington overruled an SEC decision denying Grayscale Investments permission to launch a bitcoin-focused ETF. The court's decision sets the path for a first bitcoin exchange-traded fund in the US.[127][128]
In October 2023, ProShares,VanEck and Bitwise Asset Management launched the first ETFs tied to the value ofEthereum.[129]
Earlier that year. in June, the asset management companyBlackRock filed an application with theU.S. Securities and Exchange Commission (SEC) to launch the first spotbitcoin ETF, withCoinbase as acrypto custodian. In January 2024, the SEC approved the creation and trading of 11 spot bitcoin ETFs.[130][131] By May 2024, BlackRock's ETF had amassed $10bn in assets.[132] It also emerged that ETF issuers had come into ownership ofNFTs and other tokens – known as "dust" – as part of their bitcoin holdings. BlackRock alone was said to have $20,000 worth of non-bitcoin tokens. However, the firms could not sell or pass on such dust because that could imperil an ETF's legal status and force investors to file complex tax paperwork. Blackrock's policy was to hold unexpected virtual assets in a separate wallet where they could stay in perpetuity or be donated to charity.[133]
In November 2023, BlackRock andFidelity Investments filed applications with the SEC to launch the first spotEthereum ETFs.[134] These were allowed the following May, though the SEC set the condition that the funds were not allowed to claim rewards on their coins from theproof-of-stake process.[135] However, not staking tokens meant that the funds would lose about 3% of potential returns a year.[135][136] Buying 1,000 ether at the start of 2023 (costing $1.2 million) would have netted a gain of $217,000 from staking, according to theFinancial Times, so a fund with ether worth $10 billion would lose out on rewards worth millions of dollars. That might result in fund issuers charging higher fees to customers to compensate.[135]
The first gold exchange-traded product was Central Fund of Canada, aclosed-end fund founded in 1961. It amended its articles of incorporation in 1983 to provide investors with a product for ownership of gold and silver bullion. It has been listed on theToronto Stock Exchange since 1966 and theAmerican Stock Exchange since 1986.[137]
The idea of a gold ETF was first conceptualized by Benchmark Asset Management Company Private Ltd inIndia, which filed a proposal with theSecurities and Exchange Board of India in May 2002. In March 2007 after delays in obtaining regulatory approval.[138] The first gold exchange-traded fund wasGold Bullion Securities launched on the ASX in 2003, and the firstsilver exchange-traded fund was iShares Silver Trust launched on the NYSE in 2006.SPDR Gold Shares, a commodity ETF, is in the top 10 largest ETFs byassets under management.[139]
Purchases and sales of commodities by ETFs can significantly affect the price of such commodities.[140][141]
Per theInternational Monetary Fund, "some market participants believe the growing popularity of exchange-traded funds (ETFs) may have contributed to equity price appreciation in some emerging economies and warn that leverage embedded in ETFs could pose financial stability risks if equity prices were to decline for a protracted period."[72]
ETFs can be and have been used to manipulate market prices, such as in conjunction withshort selling that contributed to theUnited States bear market of 2007–2009.[142]
New regulations to force ETFs to be able to manage systemic stresses were put in place following the2010 flash crash, when prices of ETFs and other stocks and options became volatile, with trading markets spiking and bids falling as low as a penny a share[143] in what theCommodity Futures Trading Commission (CFTC) investigation described as one of the most turbulent periods in the history of financial markets.[144][145]
These regulations proved inadequate to protect investors in the August 24, 2015, flash crash,[143] "when the price of many ETFs appeared to come unhinged from their underlying value". "ETFs were consequently put under even greater scrutiny by regulators and investors."[143] Analysts atMorningstar, Inc. claimed in December 2015 that "ETFs are a "digital-age technology" governed by "Depression-era legislation".[143]
Since the first European ETF appeared in 2000, the market has seen tremendous growth. At the end of March 2019,assets under management (AUM) stood at €760 billion, compared with €100 billion at the end of 2008.[146] The market share of ETFs also increased, accounting for 8.6% of AUM, up from 5.5% five years earlier.[146]
The use of ETFs has also evolved over time.[147]EDHEC business school surveys show greater adoption, especially for traditional asset classes. While ETFs are now used across many asset classes, in 2019, the main use was in the area of equities and sectors, for 91% (45% in 2006[148]) and 83% of the survey respondents, respectively. This is likely to be linked to the popularity of indexing in these asset classes and the fact that equity indices and sector indices are based on highly liquid instruments, which makes it straightforward to create ETFs on such underlying securities. The other asset classes for which many investors use ETFs are commodities and corporate bonds (68% for them both, compared with 6% and 15% in 2006, respectively),smart beta-factor investing, and government bonds (66% for them both, compared with 13% for government bonds in 2006). Investors have a high rate of satisfaction with ETFs (95% for both equities and government bond assets in 2019).[149]
EDHEC survey results indicate that ETFs are used as part of a truly passive investment approach, mainly for long-term buy-and-hold investment rather than tactical allocation. However, the two approaches have become more balanced, and, in 2019, European investment professionals declared that their use of ETFs for tactical allocation was greater than for long-term positions (53% and 51%, respectively).
ETFs, which originally replicated broad market indices, are now available in a variety of asset classes and many market sub-segments (sectors, styles, etc.). Gaining broad market exposure was the focus of ETFs for 73% of users in 2019, but 52% of respondents aimed to use ETFs to obtain specific sub-segment exposure. The diversity of products increases the possibilities for using ETFs for tactical allocation. Investors can easily increase or decrease their portfolio exposure to a specific style, sector, or factor at a lower cost with ETFs. The more volatile the markets are, the more interesting it is to use low-cost instruments for tactical allocation, especially since cost is a major criterion for selecting an ETF provider for 88% of respondents.
Despite the maturity of the European market in 2019, many investors (46%) were planning to increase their use of ETFs, according to the EDHEC 2019 survey. A higher level of ETF allocation would replace active managers (71% of respondents), but investors were also seeking to replace other passive investing products (42% of respondents). Lowering costs was the motivation for these changes for 74% of investors. They also wanted more ETF products in the areas of ethical,socially responsible investing, and for strategies using factor and smart beta indices. In 2018,Environmental, social, and governance (ESG) ETFs enjoyed growth of 50%, reaching €9.95 billion, with the launch of 36 products, compared to 15 in 2017.[146][150] However, 31% of the EDHEC survey respondents still wanted more ETF products based onsustainable investment, which appeared to be their top concern. By late 2024, ESG ETFs reached over $640 billion in assets.[151]
