How do Exchange Traded Funds (ETFs) work? A comparison of two ETFs tracking the MSCI World Index

Academic Paper from the year 2021 in the subject Business economics - Investment and Finance, grade: 1,0, International School Of Management, Campus Frankfurt, language: English, abstract: This term paper will mainly focus on ETFs tracking equity markets. The low costs, the simplicity of the product and the broad range of different ETFs available are the reasons why the assets under management (AUM) in the ETF industry grew by 20%2 p.a. in the last 15 years, with a continuing upward trend. This term paper is divided into two parts. The first part will start with explaining some basic characteristics of ETFs. Thereafter, different structures behind ETFs are described and factors influencing the tracking difference are analysed. In the second part of the term paper, two ETFs are compared. While one of them uses the physical replication method and the other the synthetical replication method, both of them cover the MSCI World Index. The ETFs are compared with regard to some basic information about them, but mainly concerning the tracking difference occurring from the different replication methods and other factors influencing the performance of the funds.