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According to Bloomberg, the ETF market is approximately reaching $5 trillion, though the pace of creating successful products is slowing down.

However, the industry as a whole has enjoyed solid growth in the last few years and total assets recently hit a record, giants such as BlackRock Inc. and Vanguard Group dominate the scene. 

ETFs are still an investment choice for many people, and the Federal Reserve is no exception.

In March, amid the coronavirus selloff, the central bank said it would buy ETFs in order to stabilize the financial system(a first for the U.S. central bank) – namely, the bond market.

The Fed may well have achieved its goal better than anyone could have expected. That’s because actual Fed purchases of ETFs have been a lot smaller than the overall inflows. There have been flows of $150.1 billion into bond ETFs through August 31 (about $132 billion of that is U.S. funds). As of the end of August, however, the Fed had only bought $8.7 billion worth of such funds. 

The Fed had convinced the market to stay calm amid selloff and reduce ETFs redemption, even leading to more capital flowing into the ETF market. 

Features of ETFs

As a Central Bank, why the Fed would send such a friendly signal toward ETFs? It may be related to the features of ETFs.

• Simplicity

  An ETF invests in a basket of stocks or bonds or other securities, providing simple access to a certain type of asset.

• Transparency

  ETFs usually track a benchmark index that has a transparent index methodology. The actual holdings of an ETF are published on a daily basis.

  The real-time intraday net asset value (NAV) of an ETF per share is also published as a reference for trading.

• Cost-efficiency

  ETFs usually charge comparatively lower management fees (ranging from 0.1% to 1%) than traditional mutual funds.

  Unlike mutual funds, except for minimal fees charged by exchanges and brokers, there are no subscription and redemption fees charged on top of the management fees.

• Flexibility

  As flexible as single stocks, ETFs can be traded during trading hours, whereas the subscription and redemption of mutual funds normally take several days.

• Diversity

  Compared with single-stock investment, an ETF typically tracks a certain index composed of a basket of stocks, therefore, increasing the diversity of its portfolio.

  With more and more ETFs tracking different types of indices issued, various investment demands can be satisfied.

  Besides, multiple investment themes and strategies available through ETFs give investors multiple choices for portfolio construction.

• Leverage & Inverse ETFs

  A leveraged exchange-traded fund (ETF) uses financial derivatives and debt to amplify the returns of an underlying index.

  While a traditional ETF typically tracks the securities in its underlying index on a one-to-one basis, a leveraged ETF may aim for a 2:1 or 3:1 ratio.

Given the low-risk tolerance of individual investors, ETFs are relatively simple alternatives with a low investment threshold for investors to diversify their portfolios and weather market volatility.