History and Mechanics

An exchange-traded fund (ETF) is a type of investment fund and exchange-traded product, traded on stock exchanges. ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold throughout the day on stock exchanges while mutual funds are bought and sold based on their price at day's end.

An ETF holds assets such as stocks, bonds, currencies, and/or commodities such as gold bars, and generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value. This occurs when there is a price disparity across exchanges, and arbitrage trade has become very popular in the Defi space.

Most ETFs hold the same securities in the same proportions as a certain stock market index or bond market index. The most popular ETFs in the U.S. replicate the S&P 500 Index, the total market index, the NASDAQ-100 index, the price of gold, the "growth" stocks in the Russell 1000 Index, or the index of the largest technology companies.

Apart from non-transparent actively managed ETFs, in most cases, the list of stocks that each ETF owns, as well as their weightings, is posted daily on the website of the issuer. The largest ETFs have annual fees of 0.03% of the amount invested, or even lower, although specialty ETFs can have annual fees well more than 1% of the amount invested. These fees are paid to the ETF issuer out of dividends received from the underlying holdings or from selling assets.

An ETF divides ownership of itself into shares that are held by shareholders. The details of the structure vary by country, and even within the same country there may be multiple possible structures. The shareholders indirectly own the assets of the fund, and they will typically get annual reports. Shareholders are entitled to a share of the profits, such as interest or dividends, and they would be entitled to any residual value if the fund undergoes liquidation.

As of 2017, there were 5,024 ETFs trading globally, with 1,756 based in the U.S.., with over half of the inflows going to the 20 largest ETFs. As of September 2020, assets under management by U.S. ETFs was $4.9 trillion.