BlackRock, the world's largest asset management company, achieved its fastest growth ever in the past year, with its asset management scale increasing by 25% compared to 2018, reaching an unprecedented $7 trillion. This figure has far exceeded the GDP of $5 trillion of Japan, the world's third-largest economy. The success of BlackRock can be largely attributed to its ETF products. So, what is an ETF? And why has it become so popular?

ETF stands for Exchange Traded Fund, which is a type of investment fund that can be bought and sold on stock exchanges. In simpler terms, it can be purchased directly on the same platforms used for buying stocks. The characteristic feature of an ETF is that it aims to track a specific index by constructing a portfolio that mirrors the composition of that index. For instance, the SSE 50 ETF achieves its goal of tracking the SSE 50 Index by purchasing the same types and proportions of stocks as those in the index. Like a traditional mutual fund, it builds a portfolio, but while a mutual fund's portfolio is selected by a fund manager based on their judgment, an ETF directly selects the stocks that are part of the index, with the quantity also aligning with the index's proportions.

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Why have ETFs become so popular in recent years?

We know that the performance of a fund largely depends on the performance of the stocks in the portfolio selected by the fund manager. It's a remarkable achievement for a fund to outperform the market, and such instances are rare. Even Berkshire Hathaway, led by the legendary investor Warren Buffett, does not often outperform the S&P 500. Given this, it might be simpler and more effective to just buy into the market index, thereby surpassing the performance of most funds. With this consideration, fund companies innovatively developed ETFs that track the market index, allowing for good performance without the effort of stock selection. In recent years, investors have increasingly recognized the correctness of this approach, leading to ETFs attracting record-breaking inflows. For example, BlackRock's iShares, the world's largest ETF issuer, saw inflows of $118 billion in 2019, with its total scale surpassing $2 trillion. Another reason for the popularity of ETFs is their low fees compared to other funds; some hedge funds can charge management fees up to 30%, while ETFs have very low fees, with the lowest being only 0.03%. Naturally, funds that charge less and can easily make money are sought after by global investors.

Differences between ETFs and index funds outside the exchange

In addition to ETFs, there are also index funds that are traded outside the exchange. The biggest difference between ETFs and these index funds is that ETFs can be purchased through stock trading software, while index funds outside the exchange require purchase through third-party software, such as electronic banking services offered by major banks. ETFs generally have lower management fees, usually below 0.05%, but there is often a minimum charge of $5. This means that for investments of only a few thousand dollars, the fees for ETFs may be higher compared to index funds outside the exchange. Therefore, for small fixed investments, index funds outside the exchange might be more suitable due to their lower fees and the convenience of setting up automatic investments. Additionally, ETFs have a faster price update frequency, refreshing every 15 minutes based on the index, making their tracking of the index more accurate. In contrast, index funds outside the exchange are calculated by the fund company and the custodian bank based on the net value of the fund at night, which is not as timely or accurate.

How to purchase ETFs

Purchasing ETFs is quite straightforward; all you need is a stock trading account, and you can buy them on trading platforms just like stocks. For example, if you have a Jin Taiyang stock trading software and want to buy the SSE 50 ETF, you can simply search for "50ETF" in the search bar and select it from the options that appear. Of course, if you are a high-net-worth individual, you can first purchase the stocks that make up the tracking index in the required proportions and then apply to the exchange for an ETF fund quota. This requires a significant amount of capital and is not discussed further here.

What to consider when choosing an ETF fund

When purchasing an ETF, it is important to pay attention to the liquidity of the ETF you are buying. If the liquidity of the fund is poor, you might face a situation where there are no sellers when you want to buy or no buyers when you want to sell, missing out on trading opportunities. Another issue to be aware of is the discount and premium of the ETF. A discount occurs when the purchase price of the ETF is lower than the net value of the corresponding stocks, while a premium is when it is higher. It is best to choose a brokerage trading software that can display the actual net asset value of the ETF's corresponding stocks; for example, Oriental Fortune is one such platform. This way, you can see whether the ETF price is below or above the net value at any time. Ideally, you should buy when the price is below the net value to avoid arbitrage activities that can quickly eliminate the premium, leading to unnecessary losses.What are the risks of ETFs?

The biggest advantage of ETFs is that they passively track indices, which reduces the uncertain risks brought by individual stocks, and the main risk they face is the systemic risk of the index. If you judge that an index will not have significant systemic risks in the near term and hold it for the long term, you will have a greater return. For example, if you started holding an ETF fund that tracks the S&P 500 index a few years ago, the sustained bull market in the United States for ten years would bring you huge returns.

Investing carries risks, and the above content should not be taken as investment advice.