Exchange-traded funds – additional information
Exchange-traded funds (ETFs) have been available on the financial markets since the early 1990s. They are one of the main types of investment funds, alongside mutual funds, insurance funds, pension funds, real estate funds, hedge funds or private equity funds.
The main feature which distinguishes exchange-traded funds from other investment funds is that they are always traded on a stock exchange (like common stock) and their price is determined through purchase and sale transactions.
The main purpose of ETFs is to replicate the performance of an index or a given financial instrument, rather than outperform it. For instance, an investor wishing to achieve the same performance as the Dow Jones Industrial Average index could invest in DJIA ETF. Some of the ETFs also allow tracking the opposite of index performance – if an investor thinks that the price of silver will drop, he can purchase the shares of reverse silver ETF in order to earn money on falling silver prices.
A significant advantage of ETFs over mutual funds is that their expense ratios are lower due to the application of passive fund management techniques.
Exchange-traded funds have become a popular means of money investment – their number increased from 276 in 2003 to 4,779 in 2016.