Part 2
How do ETFs work?
So firstly, an ETF company will decide to create a new fund with a specified goal. Securities are purchased in the relevant area in line with the specified purpose, and then they are exchanged for blocks of the shares in the new ETF, which are equal in value. This is referred to as an “in-kind transfer.” These blocks of shares are called the creation units. The size of these can vary considerably based on volume and demand. These are then sold to market makers and investors on an exchange. The secondary market between investors then develops.
Source: WisdomTree
So, you can see the management of ETFs isn’t trying to select assets that will outperform the market like in active management. You’re not trying to beat the price of gold. You’re trying to be the price of gold. Do you see the distinction? Many investors want to access tax benefits, diversification, and access to assets not otherwise available.
This is why this innovation has revolutionized finance, and it is hard to argue that they didn’t make markets significantly better. They have also empowered retail investors to a degree by giving them more equal assets that were previously only available to accredited investors or institutions.
Related Guides
-
Series of 3~9 minutesLast updated4 months agoTechnically Speaking – The FS Insight Primer on Technical Analysis
Three-part series on technical analysis
-
Series of 4~10 minutesLast updated1 year agoCommodities 100
An introduction to commodities for novice investors.
-
Series of 3~11 minutesLast updated2 years agoUnderstanding Risk and Return: Hallmarks of Investing
Risk/return is so crucial to investing that it is sometimes considered the essential element of the whole craft. In this guide, we provide insights and tools to better understand risk and how to control it.
-
Series of 7~24 minutesLast updated2 years agoTom Lee's Seven Principles of Evidence-Based Research
It is important to be evidence-driven when making decisions in equity markets. People have acclaimed some of our team’s market calls, but if you look closely much of the time, we were just following the data.
-
Series of 3~15 minutesLast updated1 year ago
Investor Psychology 100
You may have heard this before: Many of the world’s top investors manage their portfolios well because they manage their emotions well. But what does that look like? If you want to know more about investor psychology – arguably the most critical component of the entire game -- you’ve come to the right place. Let’s dive in.
