# What are ETFs — a guide for beginners — Part 1

**Published by:** [Crypto Knowledge Center](https://paragraph.com/@skylen-2/)
**Published on:** 2023-12-26
**URL:** https://paragraph.com/@skylen-2/what-are-etfs-a-guide-for-beginners-part-1

## Content

Recently, the term ETF has been mentioned a lot in the Bitcoin and crypto world. Find out what ETFs are and why ETFs are the most popular investment instrument today. 👇SubscribeActually, this guide part explains what ETFs are, why and how they appear, and how to understand their basic characteristics.👉 What is an ETFETFs (‘exchange-traded-funds’) are funds traded on the stock exchange. Future ETFs mostly track market indices and have no need for highly paid fund managers or analysts, which is why they have low management fees. And precisely for this reason, they often outperform (in returns) traditional investment funds (IF). For this reason, ETFs are loved by ‘small’ investors, and investment funds — by fund managers. The emergence of ETFs, in a peculiar way, revolutionized investing with simplicity and low fees. They are very similar to classic investment funds, but they are listed on the stock exchange and are traded on a daily basis like stocks.👉 When ETFs were createdETFs were created in the ’90s of the last century as an effort to enable “small” investors to passively invest in market indices. The idea of index investing did not arise with the appearance of the first ETF, but only after its appearance did it gain the momentum we see today. The first public open index fund was created in 1975. The famous Jack Bogle started it, and that fund tracked the S&P 500 index (which contains shares of the 500 largest companies traded on the American stock exchange). The first ETF was created in 1990 in Canada, and three years later the first such ETF was also established in the USA. It was the famous ‘Spider’ (SPDR S&P 500 ETF — ticker ‘SPY’) and today it is the largest and most frequently traded ETF. Currently, there are about 8.5 thousand ETFs in the world and it is one of the most popular investment methods in the world.👉 Types of ETFsETFs can hold hundreds of stocks in a variety of industries, or they can be limited to a specific sector or industry. If we look at what they invest in, ETFs can be divided into: — Bonds — can include government or corporate bonds— Sectoral — follows shares of a certain industrial sector such as technological, financial, and similar— Commodities — invest in commodities that are traded on the stock exchange— Currency — they invest in foreign currencies, etc.👉 ETFs can also be:a) Physical ETF (‘physical or fully replicating’)The provider of a physical ETF buys the instruments contained in the index it tracks. For example, an ETF that tracks the aforementioned S&P 500 index holds shares of the companies included in that index in proportion to their share (measured by the market capitalization value, that is, the total market value of the company). For example, if Microsoft today makes up, say, 5% of the index, this fund will have 5% of its assets in Microsoft shares. It is important to know that the ETFs that track a specific index and the index itself do not always match completely. The provider of ETFs can hold only a sample of the index. This often happens in the case of large indexes with thousands of stocks like the MSCI All-World Index (ACWI).b) Synthetic ETF (‘swap based’)A synthetic ETF does not invest directly in an index. It is a contractual relationship with an investment bank in which it ‘guarantees’ a certain return to the issuer of the ETF based on the index it tracks (including a dividend) for a certain fee. In short, a synthetic ETF does not physically own any instruments. They should be avoided, and in the USA they cannot even be traded.👉 Why ETF in the name is importantThe name of the ETF is also important. It serves to distinguish it from other similar products such as ETC (exchange-traded-commodities) or ETN (exchange-traded-notes). These last two categories are not UCITS compliant and carry certain risks that differ from those of investing in ETFs. It should also be mentioned:👉 Sector ETFsThematic ETFs are those that invest in specific sectors such as robotics, electric vehicles, or clean energy. In recent years, they have been on a strong rise and more and more investors are entrusting their money to just such ETFs.👉 Let’s concludeConsidering the large number of ETFs in the world, choosing the right stock, bond, or other can be quite a demanding job. Thank you for reading!

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