ETFs or exchange traded funds is an investment fund traded on stock exchanges. ETFs owe such assets as stocks, bonds, and commodities. In a simple word, ETFs are shares, which are traded on the exchange.
The structure of the exchange traded fund contains primary and secondary markets.
- Only authorized faces (large hedge funds, investment companies, etc.) can be the participants of the primary market. The participant can initiate the issuance of fund shares, exchange stocks that refer to certain fund or purchase them.
- The secondary market contains both legal and natural persons. Generally, an ordinary stock trading represents the secondary market. Subscription and redemption of shares are absent. Along with stocks and bonds, ETFs funds hold such assets as stock indexes, economic sectors, operations with fixed income, and currencies.
ETFs have been operating on the market for 20 years. The first fund was set up in 1993 with assets of $464 million. It reflected the dynamics of the famous S&P 500 index. By 2000, there accrued 80 funds, by 2006 – 359. In recent years, ETFs have become a very popular tool for diversification of portfolio investments by large and average investors.