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Jan. 22, 2023 marks the 30th anniversary of State Street Global Advisors introducing the Standard & Poor’s Depositary Receipt (SPY) to the American Stock Exchange. The SPY was the very first ETF that tracked the S&P 500 index. It is now known as the SPDR S&P 500 ETF Trust or "Spider" (SPDR) and is unarguably the biggest ETF in on the market in 2023 with assets totalling over $370 billion. Moreover, it is also one of the most traded funds; its daily share volume exceeding 80 million, resulting in a daily dollar volume of more than $32 billion. To put that into perspective, the next largest ETF has less than 5 million average daily share volume and less than $300 billion in assets under management (AUM).  
 
If that sounds like a lot of numbers, acronyms and financial jargon that’s because it is. In this article we will explain what an ETF is, a brief history behind them and how they have changed the modern trading landscape forever.  

 

What is an ETF? 

An ETF, or exchange-traded fund, is a type of investment fund that is traded on stock exchanges. ETFs hold a collection of assets, such as stocks, bonds, commodities (or a combination of these), and aim to track the performance of a specific market index, such as the S&P 500 or the Dow Jones Industrial Average. When you purchase shares in an ETF you are essentially purchasing very small increments of a wide range of financial instruments assembled under a particular theme. There are several brackets of ETF such as Sector ETFs, Dividend ETFs and Market-cap ETFs that all group different kinds of assets.  

 Find out more about ETFs with our short explainer.
 
Where Did ETFs Come From? 

As mentioned above, ETFs were first introduced in the United States in 1993 by State Street Global Advisors with the launch of the SPDR S&P 500 ETF (SPY). They were created as an alternative to traditional mutual funds. Mutual funds are typically priced once a day, after the markets close and the fund's net asset value (NAV) is calculated. In contrast, ETFs are traded on stock exchanges throughout the day, and their prices fluctuate based on supply and demand. This means that investors can buy and sell ETFs just like they would buy and sell stocks, which allows for more flexibility and greater liquidity. 

The SPDR was designed to track the performance of the S&P 500 stock market index, and it quickly gained popularity among investors. Today, there are thousands of ETFs available, covering a wide range of sectors and markets. The popularity of ETFs has grown significantly since their introduction, with assets under management in ETFs reaching $6 trillion worldwide in 2021. 
 

 
How and Why Are ETFs Used in Trading Today? 

Since their inception ETFs have become a mainstay of the trading landscape. ETF investment growth continues to grow each year and ETF assets are projected to grow to a whopping US$14 trillion by the end of 2024.  
 
One of the main advantages of ETFs is that they offer diversification, which can help to reduce the overall risk of an investment portfolio. By holding a variety of different assets, an ETF can help to spread risk across different sectors and industries, rather than having all your eggs in one basket. Another advantage of ETFs is that, as explained briefly above, they are highly liquid and can be bought and sold just like stocks. This allows investors to easily adjust their portfolios as market conditions change. This flexibility and responsiveness make ETFs an extremely versatile asset class that can fit into almost any trading strategy.  

Equally, ETFs also tend to have lower expense ratios than actively managed mutual funds, making them a cost-effective option for investors. This is because ETFs typically have lower overall fees due to their passive management style which does not require active trading or management of holdings like mutual funds do. ETFs do not incur commissions on each transaction like individual stocks do. As a result, you will most likely spend less money on your investment strategy when choosing an ETF instead of other types of investments which carry higher fees and costs. However, this of course does not account for market movements and has no bearing on the success of the trade. It is important to consider that as with any asset trading ETFs carries financial risk, including loss of capital. Investors should carefully consider their own financial circumstances before investing. 

 

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