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ETF stands for 'Exchange traded fund'. An ETF is also known as an index fund or index tracker. The goal of an ETF is to track the underlying index as closely as possible. The first index tracked was the S&P 500 in 1993. The first ETF, the SPDR Trust, is still the largest ETF in size today. ETFs are traded on the stock exchange, which should guarantee sufficient liquidity.
Since 1993, more than 700 ETFs have been added to track all kinds of indices as closely as possible. The reason that ETFs gained popularity so quickly is due to the following reasons:
- Diversification, an ETF allows investors to spread their wealth and risk across an entire index at once. Shares no longer have to be purchased individually.
- Negotiable, ETFs are just as tradable as stocks
- Low fees, other funds often charge a high management fee, but most ETFs are less than 1% on an annual basis.
Despite these nice advantages on paper, owning an ETF is something substantially different from owning the actual stocks. This is because an ETF does not give the same right as owning shares such as dividends. In the example of the SPDR S&P 500 ETF, you do not own an x number of shares, but a stake in the SPDR S&P 500 Trust. This trust is not actively managed, but it does aim to follow the S&P as closely as possible.
It is therefore good to know exactly what you are buying when you buy an ETF, this information is in the prospectus of the ETF. There are now 4,849 ETFs and other ETPs worldwide, with a total of 9,875 listings on 56 exchanges. An ETF is often listed on multiple stock exchanges.
