What are Exchange Traded Funds (ETFs)?
ETFs are low cost funds that automatically track an index for you.
So firstly, what’s an index? Well, an index is simply a basket of companies selected together. Often the basket of companies selected is a total market, and so that’s why indices are often described as ‘tracking the market’.
However, an index is just a theoretical basket, and so to bring it into the real world you have to create a fund to buy all the underlying companies in the chosen index. ETFs are one of these types of funds. And so because ETFs track an index, and an index tracks a market, buying ETFs is a way to ‘buy the market’.
ETFs have been around for over 30 years now. The first ETF was launched on the Toronto Stock Exchange back in 1990, and today there are nearly 8,000 ETFs listed around the world. The key aspect of ETFs vs. other types of funds that track an index (e.g. passive mutual funds) is that ETFs are publicly traded on a stock exchange. Therefore anyone can access ETFs directly through a stockbroker.
What makes ETFs so popular?
There are many aspects about ETFs that make them attractive directly, and most of these centre on their exceptionally low fees.
However, the most important feature driving their growth is actually highlighted in their name – ETFs are ‘exchange traded’. This means that anyone can buy and sell them directly through a normal stockbroker, and without having to go through an intermediary.
This fact, combined with the recent developments in digital technology and cloud computing, means that today ETFs open up the opportunity for companies to create entirely new business models giving customers direct access to investment funds for the very first time. And this is exactly what we’ve done at Teyk.
So it’s not just that ETFs have much lower fees than mutual funds, it’s that ETFs enable the creation of entirely new financial services ‘supply chains’ that can strip out intermediaries altogether. In doing this, ETFs help create new business models with end-to-end costs for customers which are a fraction of the traditional solutions.