Last year, investors invested nearly $ 2 billion in exchange-traded funds. ETFs are one of the most successful financial innovations of the last decade. But with success, the risks in the sector also increase.
The rising share prices have led to a boom in exchange-traded investment funds.
ETFs are one of the most successful financial innovations in recent decades. Since the first ETF was launched in 1987, the exchange-traded mutual funds have grown their assets under management to nearly ten trillion dollars. Last year was also a record year: almost 2 billion dollars flowed into ETFs worldwide.
Far from just passive investing
The basic idea of ETF is as simple as it is ingenious: A tradable fund that mostly passively tracks a certain share index. This allows private investors to build a broadly diversified portfolio without paying the high fees for actively managed funds. ETFs are particularly suitable for a passive investment strategy: Shares in the entire market are held for a long time.
But the ETF boom has also produced investment products that increasingly contradict this strategy and increase risks for investors. So exist today derivative ETFs, some of which apply a five-fold leverage to certain indices. So-called inverse funds are also based on derivatives and rely on the decline in the price of an underlying index or fund.
Leveraged and inverse ETFs in particular enjoyed great popularity last year. The assets invested in these funds rose by almost 33 percent to 121 billion. However, these high-risk investment products are more suitable for quick trading than for long-term holding.
What is actually being traded?
Another new trend are themed funds that map specific niches and trends. These thematic ETFs also experienced a surge in the past year – assets under management rose by around 20 percent to $ 441 billion.
Not only do investors with themed ETFs sometimes enter into risky industry bets, with thematic funds it is also important to check exactly how the ETF reflects certain trends. For example, the two “Work from Home ETFs” from the providers Direxion (WFH) and Blackrock (IWFH) performed very differently last year. WFH gained 11.4 percent, while IWFH posted a price loss of almost 25 percent.
Although both ETFs had the same label, the funds held very different company shares. While WFH invested almost entirely in video communications and other technology companies that enabled home working, IWFH also held shares in video game manufacturers, delivery services, and streaming providers.
Despite new risky trends, ETFs still allow private investors to invest in a broad market with low fees – demand seems to remain unchecked. However, it is worthwhile to keep the old stock exchange rule in mind, especially in times of the ongoing ETF boom: Don’t buy what you don’t understand.