With the growing trend for investors to move away from active managers, more and more money is flowing into exchange-traded funds (ETFs), one of the most popular passive investment vehicles.

ETFs are securities that trade on the stock exchange and track an index, commodity or bonds. ETFs trade like shares and can be bought and sold easily at fractions of the price of the underlying investments.

Investors have choice in terms of whether they want an index that follows the market as a whole or particular sectors or particular commodities, and can choose between local or offshore ETFs.

With the first ETF launched in Toronto in 1990, in the US in 1993, and in South Africa in 2000, ETFs are a relatively new financial instrument, but an increasingly popular one. There are now around 7 000 ETFs globally, while in SA there are 56 ETFs and 21 exchange-traded notes, or ETNs.

In fact, ETFs have grown in popularity to the extent that they have recently caused some concern, with the Financial Times (FT) saying ETFs are “eating the stock market”, accounting for more than 20% of volume on US markets. According to the FT, seven of the 10 most actively traded securities on US stock markets last year were ETFs – not shares.

CNBC quoted Elliott Management’s Paul Singer going as far as to say that the move to passive investing is “destructive to the growthcreating and consensus-building prospects of free market capitalism”. According to CNBC, “ETFs globally now have $1tr more in assets than hedge funds”, while about $2.2tr of assets are indexed to the S&P 500.

In fact, there is now an ETF, the Toroso ETF Industry Index, launched by US investment company Toroso Investments, which tracks the growth in the ETF industry by tracking companies that derive revenue from the ETF ecosystem, making it possible to buy an ETF linked to the success of the ETF industry itself.