exchange-traded strongfundsstrong evolution of benefits, vulnerabilities.pdfVIP

exChange-tRaded FundS: evOlutiOn OF beneFitS, vulneRabilitieS and RiSkS 37 BAnk oF CAnAdA • F InAnCIAL SySTEM R EVIEw • dECEMBER 2014 exchange-traded Funds: evolution of benefits, vulnerabilities and Risks Ian Foucher and Kyle Gray ƒ The global market for exchange-traded funds (ETFs) close to US$2.3 trillion in assets globally, ETFs have has exhibited strong growth in recent years, reaching become the fastest-growing investment product world- US$2.3 trillion by the end of 2013. ETFs have clear wide (Deutsche Bank 2014). advantages for investors, such as low-cost portfolio An ETF is an investment fund that is traded on a stock diversification and the liquidity of an exchange-traded exchange. Its popularity is largely attributable to the product. However, recent disruptions in certain ETF pro- benefits it provides to investors: the liquidity, ease of ducts have highlighted the need to better understand trade, and lower cost associated with an exchange- the vulnerabilities and risks associated with this market. traded product, but with the diversification of a mutual ƒ ETFs are generally perceived by investors as having fund. The structure of ETFs also shares certain character- equity-like liquidity, but in times of stress, this liqui- isti