Exchange-Traded Funds: Concepts and Contexts
This chapter is designed to provide theoretical framework for the empirical research regarding development of ETFs markets. The special emphasis is to put on the innovative funds in the Asia-Pacific region. It discusses the basic mechanisms of ETFs, showi
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Exchange-Traded Funds: Concepts and Contexts
2.1 Exchange-Traded Funds: History and Features Section 2.1 focuses on the history and main features of the exchange-traded funds (ETFs). We begin by presenting the context of the launch of world’s first ETFs in North America, followed by the brief discussion concerning their spread to other regions. Then we discuss the basic mechanisms of these funds, i.e., their launch, distribution, and turnover, showing the role of various participants of the ETFs markets and distinguishing between primary and secondary markets. Finally, we compare ETFs to their main alternative in the financial system—mutual funds—showing the similarities and differences between the both categories of investment funds. In order to be able to adequately discuss multiple issues linked with ETFs, it seems necessary to first define them and describe their position in the financial system. There are many definitions of ETFs, some of them slightly different, depending on the feature which is considered as the most significant by the particular author (individual or organization). We do not present the detailed overview of various concepts but rather cite a few most representative (and most often applied) ones. We start by presenting definitions of some of the most influential organizations linked with the global financial markets. International Monetary Fund defines ETFs as a “type of collective investment vehicle traded on an exchange (…)” (International Monetary Fund 2015, p. 139). Investment Company Institute (ICI), an association of the US mutual funds and similar companies, uses the following definition: “investment company (…) whose shares are traded intraday on stock exchanges at market-determined prices (…)” (see “Glossary” in Investment Company Institute (2017, p. 271)). Very similar definition (yet slightly abbreviated) may be found in the online glossary of The International Investment Funds Association (IIFA) that groups investment company’s associations from various countries. ETFs are also defined by the regulatory bodies; for instance, the International Organization of Securities Commissions (IOSCO) states that they are “open ended collective investment schemes (CIS) that trade throughout the day like a stock (…) (g)enerally, © Springer Nature Switzerland AG 2019 A. Marszk et al., The Emergence of ETFs in Asia-Pacific, https://doi.org/10.1007/978-3-030-12752-7_2
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2 Exchange-Traded Funds: Concepts and Contexts
ETFs seek to replicate the performance of a target index (..) investors may trade ETF shares continuously at market prices (…)” (The International Organization of Securities Commissions 2013, p. 1). The topic of ETFs has been covered in many publications over the recent years, albeit from different perspectives—these differences are evidenced to some extent by the varying definitions adopted by the authors of such publications. In one of the first comprehensive publications on ETFs (the first edition was published in 2002 when ETFs were still rather “exotic” part of the fi
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