Exchange traded funds (ETFs) have come a long way from index-based products tracking major stock benchmarks like the S&P 500.
In total, around $1.4 trillion is invested in some 3,500 ETF products globally, reports Tom Lauricella for The Wall Street Journal. The report adds that ETFs are changing not only investing but also the underlying markets they track.
“Buying and selling of ETF shares ripple across markets to the funds’ underlying securities,” Lauricella writes. “Wall Street firms have reshaped their trading and sales operations to focus more on ETFs and less on individual stocks. On any given day, ETFs are among the most actively traded securities in the U.S. markets.”
Now, investors may browse through a range of ETF products, but they should still be aware of the potential pitfalls that come with the more sophisticated funds.
ETFs are transparent, low cost and tax efficient investment tools that may be used by the average investor. The funds provide access to markets and strategies that were once only accessible by institutional investors. Peter Crawford, head of marketing of outside funds at Charles Schwab, remarks that ETFs have shifted “from institutions to the professional adviser and now to the mainstream investor.”
Back in the day, passive ETFs only tried to mimic major indexes, but the scope and complexity of the financial products have grown as ETFs gain popularity.
Now, some experts contend it’s too easy to trade ETFs and that there are many complex and risky products on the market. [ETF 101: What To Watch For When Investing.]
For more information on ETF basics, visit our ETF 101 category.
Max Chen contributed to this article.