Mille Lees, Tuesday 17th December 2019, 4:53 PM CET
Exchange Traded Instruments

Exchange-Traded Instruments & Funds Explained

The onslaught of challenges that encompass exchange-traded instruments or funds hasn’t stopped their rapid advancement. Investors and traders continuously have found ways around these financial instrument challenges. ETFs comprise blockchain securities, indexes, or financial instruments. They mirror stock commodities in an online basket, which acts as an internet-based exchange. Subsequently, individual instruments become universal, which allows for any trader to acquire potential contracts or funds. Though ETFs have been operational for a prolonged period, their essence in the trading and financial landscape began less than a decade ago.

Multiple management firms have compiled extensive research over a decade, showcasing how ETFs have risen in popularity over the last decade. Throughout 2008, these financial products exchanged $800 billion. Since then, that number has increased to an average of $5 trillion. Below we analyze what newly minted traders or investors can anticipate with these Exchange Traded Instruments and Funds.

Anonymity in Trading

The reasoning for these exchanges’ drastic popularity increases is because of the unapparelled capabilities provided to investors. Unlike standard stock markets, which limit brokers and newly licensed traders, the online blockchain space encourages the unique construction of portfolios. Conventional Blockchain Portfolios don’t need to center around one currency or contract but can be a hybrid of numerous products. Subsequently, Blockchain Traders and Investors can engage with everything from mutual funds to decentralized liquidity. Exchanges like Binance, Huobi, and Coinbase have been the proprietary leaders in the advancement of ETF’s.

The associated risk that comes with investing is minimized extensively when using these blockchain portfolios. Decentralized and Centralized platforms maintain two-tone verification systems, which guarantee’s the safety of traded funds. This technology was implemented less than 24 months ago, which is why the last two years have seen advancements in client acquisition. Another factor that’s boasted client acquisition percentages is the associated costs with online trading, which has dropped drastically in the last twelve months. Systematic errors with online trading, such as paying a fund manager or paying a monthly fee, are beginning to disappear. Subsequently, aggressive behaviors amongst traders have been limited by a significant amount.

Having the capabilities to maintain a diverse portfolio with low to zero fees is an essential factor for any trader. However, both these factors are nothing without the associated transparency that comes with online investing. Most funds in the cryptocurrency/blockchain market are sold throughout specific times in a trading day. ETF’s are maintained 24/7, which allows for ambiguity in how contracts and funds are approached. The contracts-for-differences related to ETFs are considered to be the most prominent assets available on cryptocurrency exchanges.

Additional funds are public knowledge for competing traders to research, as stock market transactions are showcased on individual financial boards. This goes against the standards implemented by mutual fund managers, who don’t legally have to disclose any of their clientele’s information to authorities. All that’s needed from mutual fund managers are the unveiling of personal holdings twice-per-year. These holdings are disclosed to provide governments insight with how much funds are exchanged throughout the crypto market.

Market Fragmentation

The significant challenge that faces over exchanges in the modern era is the territory. Multiple exchanges can operate in respective countries; they’re competing for market leadership. The fragmentation of profits and territory has continuously been brought up for a decade. However, the Target 2 Securities Platform looks to be the solution for online brokers. The revised Market Financial Instrument Directive (MiFID II) is separate standard trading markets from online exchanges.

Subsequently, this will create a barrier between these respective industries and enable them to continue their independent growth.

The Head of Equities for TradeWeb, Adriano Pace, spoke on the advancement of MiFID II. He provided an insight into what the impact of the market will be and noted that it would be beneficial for Exchange Traded Fund Market by enforcing a new standard of trading. Adriano Pace officially stated to reporters: “MiFID II has increased investor confidence in the depth of the ETF market. It’s an important point because before, you could only see the liquidity on the exchange. It’s helped us because clients are more confident in executing large trades electronically.”

Adriano wasn’t the only individual to comment on the changes coming to ETF markets in the following weeks. James McManus, the Head Digital Investment Manager for Nutmeg, also spoke on the revolution with reporters from ETF Express. He stated: “The revolution promised by MiFID II has not happened as yet. ETF providers need to ensure investors have access to the right data. Investors can’t easily see the full extent of the picture.”

The Future of ETFs

The development of ETFs in a legislative format has increased the tactical capabilities associated with trading instruments. These investments were considered passive, which is beginning to change into a new perspective. Traders engaging with ETFs see these traded instruments as the perfect portfolio asset, which is pushing its popularity to new heights. The Morningstar reported in 2017 that 39% of online investors engaged with ETFs. Throughout the last two years, that number has doubled to 80%. These include traded funds with bonds, stocks, commodities, contracts-for-difference, and other financial products. ETFs also engage with multiple asset currencies worldwide, making them the most accessible for international investors.

The Future of ETFs

The lack of an associated cost is the primary factoring driving the growth of ETFs. Cutting back the costs of investing, while maximizing profits is a concept that traders cannot pass away. When surveying the masses, the Morningstar found the associated costs for open-end exchange-traded funds and mutual funds. That statement reads: “The study found that across U.S. funds, the asset-weighted expense ratio dropped to 0.48% in 2018, compared to 0.51% in 2017. As a result, investors saved an estimated $5.5 billion in fund fees in 2018. This 6% percent year-over-year decline is the second largest recorded since Morningstar began tracking asset-weighted fees in 2000.”

So with all of this information now know, what’s the moral of ETFs? It’s that the rapid advancements in financial technology have opened opportunities for traders to transition from mutual fund stocks. It’s the transformation in trading models that appeal to financial investors, which is which thousands switch from standard stock markets to online exchanges every year. Another surveying firm provided their findings to the public, which read: “About $930 billion actively managed U.S. equity funds from 2009 through 2017, while about $848 billion moved into comparable ETFs.”

This means that the BlackRock Survey Group sees minor changes occurring to the financial advisory mechanics. Though this would change ETF investment opportunities on a seismic level, it would enable for 2/3rds of the traded funds into the United States to be ETFs. Subsequently, standard citizens engaging with online trading are the beneficiaries and not these large brokerage houses.

The performance for ETFs in December 2017 exceeded €721 billion. This number has now jumped to €13.2 trillion, indicating that thousands of trading clients are earning substantial profits. Regulated stock markets in New York, London, Hong Kong, and Dubai have been quick to respond. Those their financial responses were ignored, with the willingness of traders to engage with online platforms increasing daily. All of this is because of the changes that occurred to MiFID II, providing an added level of security for on-the-fence new acquisitions. With all that information known, all that’s needed is for our readers to begin engaging with this transparent market. The exchange-traded instruments and funds apply to dozens of exchanges, so the choice of where your adventure begins is all on you.

Author: Mille Lees

Millie has been with since the start. She has a passion writing financial news after an internship at Bloomberg London. Millie's background in journalism and politics means she has an eye for a good story. Millie graduated from LSE and has a masters from Durham University England. Mille Lees can be contacted at [email protected], View all posts by Mille Lees

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