Year 2021 was a good year for the stock market. The stabilisation of financial markets and a strong institutional backing of governmental recovery plans in the EU and the US helped indexes such as the S&P 500 or the Dow Jones to rise to record highs. Of course, this has meant that individual stocks of many of the largest public companies such as Apple or Tesla have continued to rise, spiking during the last quarter of 2021. However, the zero-interest rate environment and inflation fears have exacerbated the lack of demand for cash. Accordingly, we have seen many financial products’ demand increase. One of such products are ETFs, or Exchange Traded Funds.
Funds, unlike stocks, are not issued by a specific company, instead they hold multiple stocks, commodities and other securities in a bundle. This allows investors to easily diversify their portfolio without having to hold multiple stocks themselves.
Products such as these provide good and relatively cheap alternatives to holding cash, as most online brokers offer to buy shares of these products at no commission. ETFs provide a way of investing in diversified funds which tracks an index, sector or commodity. However, ETFs themselves are also traded in the market which means that its value is constantly being determined by its buyers and sellers. ETFs also differ from mutual funds because they do not actually hold stock of companies or other assets in their description. They only follow their value in the market. The most common ETFs track indexes such as the S&P 500 or the FTSE All-World.
However, the recent rise in the popularity of these products has come with a downside. The number of ETFs has been increasing rapidly in recent years and that may cause a saturation of the market where some ETFs trade at low volumes and are hard to sell which leads to lower liquidity than expected for ETFs. Besides, after the most recent Fed policy announcements in which they forecasted up to 4 interest rate hikes in 2022, investors’ appetite for alternatives to cash might decrease which may lower the popularity of these products.
Nonetheless, ETFs are here to stay, as more people become interested in trading, made easier and cheaper by online brokers they provide an easy way of having a diversified portfolio and access to specific industry sectors without having to take the risk of buying specific stocks or trusting mutual fund managers.