Exchange-Traded Funds: Concepts and Contexts

Abstract

This chapter is designed to provide theoretical framework for the empirical research regarding development of ETFs markets. The special emphasis is to put on the innovative funds in the Asia-Pacific region. It discusses the basic mechanisms of ETFs, showing the role of various participants of the ETFs markets and distinguishing between primary and secondary market. It compares ETFs to their main alternative in the financial system—mutual funds—showing relative advantages and disadvantages of both categories. Additionally, key events of the ETFs’ history are described. After the introductory discussion, it presents the main categories of ETFs, classified according to the key criteria, including the replication method, distinction between passive and active funds, approaches to the rate of return in relation to their benchmarks, and types of underlying assets. The third part of the chapter is devoted to the discussion of the definition of the ETFs market development, comparisons between ETFs and stock index derivatives (with the focus on the stock index arbitrage complex), presentation of applications of ETFs, and providing some insights into the topic of the determinants of the ETFs market development. Finally, it discusses the main characteristics of the Asia-Pacific ETFs markets—it presents the summary of their history, main market development statistics (in terms of assets, number, and other attributes), their structure, and position of ETFs in the Asia-Pacific investment industries (compared to mutual funds).