Exchange-traded funds: A cheap and simple trading tool

The popularity of exchange-traded funds has exploded. And considering their benefits, you can see why. But global financial watchdogs are getting worried - should you be?

Financial watchdogs in Washington, London and Basel are worried. In the last few years exchange-traded funds (ETFs) have exploded in popularity. Regulators fear that they pose a "systematic risk" to the financial system. Even BlackRock, the world's biggest ETF provider, has its doubts. "I fear that an exchange-traded product will break down one of these days and the worry is that it will poison the entire sector," says Mark Wiedman, head of the firm's iShares division. So what are ETFs and should you be worried?

ETFs are financial instruments designed to track the performance of an underlying asset from stockmarket indices to individual sectors to currencies without the expense and hassle of direct investment, or the cost of paying an active fund manager.

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