In this lesson, we’ll introduce Exchange Traded Funds or ETFs, and get an understanding of how ETFs work. ETFs are considered a significant innovation in finance. One might say that ETFs did for the financial services industry, what smartphones did for the tech industry. As the introduction of ETFs led to evermore products that customers just couldn’t get enough of. The world’s first ETF was created by the Toronto Stock Exchange in Canada in 1990. The market value of ETFs in the US market grew from $100 billion in the early 2000s to $3.4 trillion by 2017. Globally there are about $4.5 trillion invested in ETFs. Broadly speaking, as ETFs have gained popularity due to their low fees and accessibility, they’ve been taking market share from traditional mutual funds. ETFs have lower fees because they have lower operational costs, and their transactions are structured in a way that can avoid some of the taxes that traditional mutual funds normally pay. The lower operational costs are usually due to passive investment management, which requires less frequent trading and therefore lower transaction costs. We will point out other cost savings as we cover more details about how ETFs works.