ETFs - History and Mechanics

An exchange-traded fund (ETF) is a form of investment vehicle that is traded on stock exchanges. ETFs are comparable to mutual funds in many respects, except that ETFs are purchased and sold on stock exchanges throughout the day, whereas mutual funds are bought and sold based on their closing price at the end of the day.

An ETF invests in assets such as stocks, bonds, currencies, and/or commodities such as gold bars and uses an arbitrage mechanism to maintain its price near to its net asset value. This happens when there is a price difference across exchanges, and arbitrage trading has grown in popularity in the Defi industry.

The majority of ETFs hold the same securities in the same quantities as a certain stock or bond market index. The most popular ETFs in the United States mirror the S&P 500 Index, the whole market index, the NASDAQ-100 index, the price of gold, the Russell 1000 Index's "growth" stocks, or the index of the top technological firms.

Aside from non-transparent actively managed ETFs, the list of equities that each ETF holds, as well as their weightings, is usually provided daily on the issuer's website. The biggest ETFs have yearly costs of 0.03 percent or less of the amount invested, whereas speciality ETFs might have annual fees of more than 1% of the amount invested. These fees are deducted from dividends collected from the underlying holdings or from the sale of assets and paid to the ETF issuer.

An ETF divides its ownership into shares, which are owned by shareholders. The specifics of the structure vary per country, and even within the same country, different structures may exist. The assets of the fund are owned indirectly by the shareholders, and they normally receive dividends.

Annual reports are issued. Shareholders are entitled to a portion of the earnings, such as interest or dividends, and to any residual value if the fund is liquidated.

As of 2017, there were 5,024 ETFs trading globally, with 1,756 located in the United States, with the top 20 ETFs receiving more than half of all inflows. Assets under managed by US ETFs were $4.9 trillion as of September 2020.