By now, everyone has heard the expression “financial innovation” to refer to changes that have taken place in our financial markets. Like all innovation, the goal of financial innovation is to solve problems. To bring our intelligence to bear on the problems that we face. Sometimes those innovations fail completely. At other times they achieve a narrowly defined success while causing new problems to emerge in their wake.
One of the financial innovations that have worked out comparatively well are Exchange Traded Funds (ETFs). ETFs have a lot in common with ordinary stocks. They are listed on a stock exchange and you can buy and sell them just like any stock. Like stocks, ETFs represent fractional ownership in a corporation (the issuer). What distinguishes ETFs from ordinary stocks is the trading strategy of the issuer.
