What are ETFs and Why are they Revolutionizing the Financial Sector?

What are ETFs and Why are they Revolutionizing the Financial Sector?

Discover what are ETFs and find out why are they revolutionizing the financial sector. Read all the information and details in this article. Keep reading!

Discover what are ETFs and find out why are they revolutionizing the financial sector. Read all the information and details in this article. Keep reading!

This type of instrument combines characteristics of conventional investment funds and stocks. Like funds, ETFs allow you to invest in a portfolio that includes dozens of stocks, bonds, or derivatives.

But, while the former need a couple of days to execute the buy and sell orders, ETFs are traded on open markets, such as stocks, which allows them to be more liquid and more transparent.

This type of instrument combines characteristics of conventional investment funds and stocks.

The history of ETFs, like that of many technological advancements, has a lot to do with basic research. During the 1960s, University of Chicago professor Eugene F. Fama focused on the efficient markets hypothesis. This theory assumed that in a well-performing stock market, the listing price is very close to the intrinsic price.

The practical conclusion of this theorem is that there is little point in paying investment managers a lot of money to buy or sell stocks at the best price. While Fama continued to investigate (he would go on to win the Nobel Prize in Economics in 2013), one of his disciples decided to put it into practice.

The practical conclusion of this theorem is that there is little point in paying investment managers a lot of money to buy or sell stocks at the best price.

Keith Shwayder, a recent graduate of the University of Chicago, began working in 1971 at the company founded by his grandfather: the Samsonite luggage factory. Encouraged by theoretical studies, he decided that the company's employee pension fund would be a passive management vehicle that would replicate the evolution of all the listed companies on the New York Stock Exchange. That was a disaster, because it was not easy to implement for a relatively small estate.

Two years later, Wells Fargo Bank created the first index fund, open only to wholesale clients, that tracked the performance of the S&P 500 index.

The indexed investment allowed to enter the stock markets with much lower commissions (there are no managers or analysts to pay). Time ended up showing that, in addition, indexation allowed to achieve better returns than most conventional investment funds.

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