[Essay Writing HW#1] Characteristics of ETFs

According to Bloomberg, investors have been rushing to buy US exchange-traded funds (ETFs) composed of Chinese equities. What is an ETF? How can the funds induce US investors purchase of Chinese assets through US exchanges? ETFs are funds that are traded like equities. 

To form of an ETF, liquidity providers, primarily including brokerage firms, organize a basket of underlying assets. Per the regulations of an individual exchange, the basket should have a certain number of different securities, such that each ETF has different characteristics. For example, an ETF could be a China-market cap-index fund if it is composed of the top 5 Chinese listed companies

Two characteristics define an ETF, differentiating it from other funds. First, the fund should be traded in a market which includes listed securities. All funds other than ETFs belong to over-the-counter markets, markets which are not regularly opened. When ETFs are listed in an exchange, they provide more liquidity to investors, as investors have no obligation to find a trade counterparty. The exchange automatically matches sellers and buyers. 

Secondly, as an ETF is formed from multiple underlying assets, each should be a diversified investment. The underlying assets inevitably have different rates of return. Some may have substantially positive returns while the others have small returns or even run at a loss. As an ETF is a basket composed of whole assets, it provides risk diversification to investors. Kyusung Jeon, who is working at the Korea Stock Depository noted that, “in last three years, the total volume of funds held by Korean investors increased by 4 times, from 1.1 billion to 40 billion dollars.” Among the wide variety of available funds, ETFs are key market-making securities, and are among the most liquid and diversified assets. 

 1 S. S. (2019, July 1). Amassing Chinese Stocks Proved the Right Call for G20-Savvy Investors. Retrieved July 3, 2019, from https://www.bloomberg.com/news/articles/2019-07-01/amassing-china-stocks-proved-right-call-for-g20-savvy-investors
 2  Funds' life from subscription to dismission [Interview by K. J.]. (n.d.). Retrieved July 2, 2019. *this is a hypothetic interview*