How ETFs are changing the financial world, clearly explained (2024)

I've heard a lot about ETFs, should I invest in them?

How you invest your money is of course your decision. I don't want to advise you on anything here. But I can tell you: Investing in passive ETFs is cheaper than a classic investment fund and will almost certainly bring decent returns in the long term.

Even if you don't want to advise me, that sounds great!

Yes, passive ETFs are many Germans' dream come true. They may also be one reason why more and more people are now venturing into the stock markets. This is why many bank advisors have customers running away.

Second, that happens very quickly! What was the difference again between a “classic” investment fund and an ETF?

Let's start with the investment fund. Let's assume you and your friends want to invest in stocks. But what should you buy now? Tesla, Siemens or even Gamestop? Luckily your friend Henri knows his stuff. He collects money from you and invests it. You call the whole thing: “We trust Henri”. In the real world, you only know Henri briefly, if at all. He works in a bank or an asset management company and “We trust Henri” is an investment fund.

Anyone who has the necessary change can give their money to the Henris of this world and he will invest it as he sees fit. Once a day you could find out about its price and if it looks good, maybe others will join in. This is how things have worked in the financial world for the past few decades.

And what is different with ETFs? What does the abbreviation actually stand for?

ETF stands for exchange-traded fund. And that describes the biggest difference: They are traded on the stock exchange like stocks. Unlike investment funds, with ETFs you can see what the prices are at any time and buy or sell them.

So ETFs are as flexible as a stock, but less risky for me?

Yes. This is the case with passive ETFs.

And what does “passive” mean?

With passive funds and passive ETFs, it is not Henri who decides what happens to your money, but rather, for example, the fund simply forms the composition of an external list such as the American Dax, the S&P 500. He would then have to say “We trust the S&P 500”. , instead of “We trust Henri”. Some also call passive investment funds index funds.

The first major ETFs were all passive, but thanks to hype they are now available in every form imaginable. That's why there are now ETFs that are curated by a person. FromCannabis-ETFsbisBitcoin-ETFsEverything is there now. Still, passive ETFs are the largest, which is why I'm focusing on them.

I heard that ETFs are good for beginners?

Yes, because you don't have to follow stock prices all day or know what "commodity futures" are to take care of your retirement planning yourself. All you need to do is decide on a savings plan once. You can leave your money behind even if the financial market crashes. ETFs are a low-threshold entry into the stock business. They are easy. That's why some say passive ETFs will democratize financial markets.

Okay, “some say” – so you see it differently?

Democratization is a big word – and at least not the whole story. It is of course true that passive ETFs also make it easier for people like you and me to become stock market winners. But due to the massive hype, power in the financial markets has been concentrated in a few companies that have become incredibly powerful.

They influence how big companies around the world behave and, with a mere threat, get the Peruvian finance minister to get on a plane to fly to New York and negotiate with the CEOs. More on that later. And that is anything but democratic.

Okay, awesome. Give me some numbers: How much money is involved here?

In 2005 the values ​​were negligible, but since the financial crisis the curve has risen sharply. In 2020, 15 trillion euros were invested in passive funds.

How ETFs are changing the financial world, clearly explained (1)

To be honest, I just can't imagine such large numbers.

That's similar to me. I'll try a comparison: If you counted up to 15 trillion and needed a second for each number, you would be busy for 475,650 years. That's longer than there have been hom*o Sapiens on this earth.

I didn't realize that 15 trillion was such a huge number. Since when have ETFs even existed?

The first passive fund for private investors was launched in 1974 by the then 45-year-old Jack Bogle, who was unusually modest in the financial world. For example, he wore his clothes until they fell apart. In an interview with the podcastPlanet Moneyhe said, his sweater was 15 years old, his pants “only” eight. In that respect he was a child of his time. He was born in the middle of the Great Depression. Because of his family's financial difficulties, he started working at the age of ten, writesCNBC. Bogle died in 2019.

But back in 1974, Bogle was sold on the idea of ​​index funds. He had read an article by Paul Samuelson, one of the founding fathers of neoclassical economics. There he criticized the previous strategies of stock brokers. They looked at curves, gathered insider information, or hung on the phone to buy and sell, sometimes with two receivers on their ears at the same time, like this man here.

But all of this would bring less profit than simply following the markets. Because it is so incredibly difficult to beat the market.

What I still don't understand: If passive investments are such a great idea and the first attempts were made in the 70s, then why did it take so long for them to become established?

Simply recreate an index instead of thinking strategically about where you wanted to invest money and when? In order to then earn as much as the stock index gave - never again? That sounded like mediocre. And neither the investors nor the bankers were interested in mediocrity. They wanted excitement, competition, the pursuit of success!

Some even considered doing without it“un-American”.

And what happened to Bogle's fund?

Despite an advertising campaign of eleven million dollars, Jack Bogle was only able to attract a tenth of the hoped-for starting assets for his fund. A disaster. In the beginning, Vanguard's S&P 500 Index Fund was often called "Bogle's Folly" in the financial world. Even ten years after its launch, hardly anyone invested in the fund. Anyone who didn't ignore Bogle laughed at him for clinging so stubbornly to this idea.

But she seemed to care for some of them. Competitors had printed a poster warning about index funds. Decades later, that poster still hung in Bogle's office. That was when the financial world had long since viewed index funds as one of its most successful inventions of the 20th century and celebrated Bogle as a hero.

And when did this success of index funds come about?

With the financial crisis. There were several reasons for this. Firstly, during the crisis, investors sensed how wrong things can go if you trust bank advisors or hedge fund managers. Many Americans lost their homes because they were part of opaque financial products. The investment bank Lehman Brothers, considered infallible, went bankrupt. After these events, it suddenly became tempting to simply tie your money directly to the S&P 500 index.

But there were financial crises before 2008, right? Why didn't the success of passive ETFs come sooner?

Oh well. The major asset managers Vanguard and Blackrock began promoting passive ETFs to a much greater extent during the financial crisis. An early fan of passive investments helped them: Warren Buffet. He bet a million dollars in 2008 that he would make more profits over ten years on Bogles Folly, the Vanguard S&P 500, than a hedge fund investor who was allowed to hand-pick hedge funds. Buffet won hands down. And himsaidon Bogles: “If a statue were to be erected to honor the person who did the most for American investors, the choice would undoubtedly be Jack Bogle.”

Was Jack Bogle rich at the end of his life?

He wasn't a billionaire like Buffet. He “only” owned a high double-digit million sum. Warren Buffett has ten thousand times as much money.

Bogle had designed Vanguard so that his company belonged not to him but to everyone who invested in his funds.

So sorry, but that's not exactly a lot of money.

No of course not. But if he had wanted to, Bogle could have amassed much more wealth. After all, he was the founder of one of the two largest asset managers in the world. Vanguard and Blackrock together managed a total of $16.6 trillion in 2020. If you stuck the sum together in $50 bills, the tape would reach from the Earth to the Moon and back again 66 times. And then again to the moon.

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Tell me, isn't Blackrock the company where CDU politician Friedrich Merz sat on the German supervisory board?

Yes, that's right. But now he is back in the Bundestag. This man is much more interesting to us than Merz:

How ETFs are changing the financial world, clearly explained (2)

Uh, that's not Warren Buffett at a young age, is it?

No, that's Larry Fink, the CEO of Blackrock and loudFinancial Timesthe most powerful man on Wall Street. The newspaper writes that he has now entered the league of corporate bosses who are simply referred to by their first names, like Elon and – actually – Warren.

So let's call him Larry. Larry has one of those classic upwardly mobile biographies that media outlets like the Financial Times particularly love: His father was the owner of a shoe store. Because Fink was worse at school than his brother, he had to help out there regularly in his youth. However, his mother was an English professor. So he wasn't a working-class child, even if this story can easily sound like that. After college, he took a job at the investment bank First Boston and quickly rose through the ranks.

Like any good Wall Street wunderkind story, there was a moment of defeat, of catharsis, in Larry's life: Larry says he was on his way to becoming CEO of the company in 1986 when he and his team lost $100 million .

100 million dollars!

Exactly. If you can't imagine how much that is, take a look at this yacht. It costs so much.

So Larry was kicked out. He founded a new company with colleagues from First Boston. It later became Blackrock.

And Larry became a billionaire!

Yes, in fact, his net worth is estimated at a billion dollars.

Does he have so much political power because he is so rich?

No, not primarily, although that may help. His political power expresses itself differently. Blackrock, for example, has close ties to the White House.

In fact, starting in 2008, BlackRock advised the Obama administration for a tidy sum and explained to it how it could handle the financial crisis. Larry is considered the inventor of the very securities that bundled real estate loans and triggered the financial crisis when they burst.


Some of President Biden's advisors also previously worked at Blackrock. This makes Blackrock the most politically influentialWall-Street-Firma. This means it takes the place previously occupied by the Goldman Sachs bank. This text in the newspapers of German and international politicsspeakshence the term “black rock capitalism”.

Okay, that's interesting, of course, but such connections between the financial industry and US politics are nothing new.

This may be. But Blackrock doesn't just influence White House policy. Together with Vanguard and a third company called State Street, Larry and Blackrock dominate the ETF market: in 2016, they held 71 percent of the market, write political scientists Jan Fichtner, Eelke Heemskerk and Javier Garcia-Bernardo in thisPaper. They call this the hidden power of the big three.

Together, these three asset management companies own, on average, a fifth of every large listed US company. And Blackrock also holds a stake in every second company among DAX companiesThe biggest part. That's why one speaksStudyfrom 2019 by the “Ghost of the Giant Three”.

And that didn't happen before?

Financial giants such as Rockefeller and J.P. have recently been similarly powerful. Morgan. But that was a hundred years ago. And if Rockefeller thought the price of a company was unpromising, they simply sold their shares in the company and the price fell. The company bosses wanted to avoid that at all costs.

Yes, of course, in every stock market news story an expert explains with an important voice why investors are currently uneasy.

Exactly. But there's a key difference here: If Larry believes a company will make losses in the next few years, he can't simply kick it out of his large passive ETFs.

That's also the reason why some people still don't think much of ETFs. The Bernstein asset management company called passive investment 2016worse than Marxism– there probably couldn't be a worse insult from a US asset manager.

Do the big three also influence individual companies?

Yes, there is indeed evidence that the big three have a very direct influence on the companies in which they own shares. There are the usual routes via the back room. If Blackrock doesn't agree with a company's course because it's not particularly promising, you can chat with the managers. They really enjoy doing that too. Between 2014 and 2015, BlackRock managers met more than 1,500 times with representatives of companies they have in their portfolios. Non-public, of course.

In addition, since the financial crisis, Larry has written a letter once a year, which always begins with the phrase “Dear CEO.” In it, Larry advises all company bosses in the world how they should manage their companies in order to create sustainable value. Not only are the CEOs eagerly awaiting the letter, the financial press is also piling on it. The German-speaking oneWikipedia-Articleto Larry Fink lists every “Dear CEO” letter he has ever written.

A few years ago, Larry discovered the climate crisis and social responsibility and now urges CEOs to transform their companies into sustainability role models.

Aha, and the CEOs all listen to Larry?

Initial researchshow that companies in the US have adapted their language to that of “Dear CEO” letters. And in a crucial place: in the documents in which companies have to disclose their actions to their investors.

Also: You've probably noticed that every company now wants to be sustainable: Nike claims that they produce the most sustainable sneakers in the world, Starbucks makes a big announcement that they don't use straws in their cups, and almost every clothing company now has a range , for which they use organic cotton. There is at least a parallel between what Larry says and what CEOs do.

Yes, but that's often greenwashing, isn't it?

Often it is, yes. NikeshuddersAccording to research, new sneakers are in Starbucks' straw-free cupsmore plastic than beforecontained and a few collections made from organic cotton do not change the problems of the fast fashion industry. In theory, Larry and the big three have another way to really force companies to be sustainable: the general meeting.

That annual meeting where company bosses in suits explain why they're doing everything right and why next year will be the best year ever for the company?

Exactly. You probably know this from the news: This is where shareholders who are not satisfied with the profit figures or the CEO have their say. Blackrock and Co. together have an average of a quarter of all voting rights there. That's more than they own shares. Because not everyone who holds shares comes to the general meetings. They could use this power in crucial votes to block the plans of the company bosses.

Do they do that too?

At least rarely at general meetings. Jack Bogle's successor Tim Buckley, Larry and Ronald O'Hanley, the CEO of State Street, could determine the fate of many companies. If Larry cares about climate protection as much as he says in his letters, he could ensure that the BlackRock shares would be used to support projects that force companies to do more climate protection. Because at general meetings there are usually a handful of activist shareholders who want to force exactly that. Blackrock could join them. In ninety percent of cases, the Big Three vote exactly as company management suggests for its shareholders - and not for more environmental protection.

Aha. So Larry's letters are just greenwashing?

Larry heard this criticism often. Writing nice letters about how climate protection is important to him won't save the earth. In order to take the wind out of the sails of its critics, BlackRock has announced that it will now let representatives of its large institutional investors vote themselves.

But that sounds good, right? Then Blackrock no longer has so much power on its own, but rather it is distributed more?

Oh well. In fact, this only shifts power one position further back. Because most of the large institutional investors are pension funds from Western countries. This means that it is now up to their voting behavior whether companies really enforce higher environmental and social standards - or just claim that. However, this shift in power means that another player comes into play: the index providers.

Index provider? What are they doing?

Basically what her name suggests. They provide an index, something like the DAX. So a weighted list of companies that is sorted by share price or market capitalization. In the past, this was simply helpful information for investors, on the basis of which no decisions were made. Today, however, the mere fact of whether a company is listed in one of the major indices or not can determine whether millions of dollars flow into its shares. The world's largest and most important companies are MSCI, S&P Dow Jones and FTSE Russell. They earn decent money, with average profit margins of 60 percent. And they can now influence political decisions in large countries.

Can you give me an example of this?

Let's take a particularly important index, the MSCI Emerging Markets. It is made up of listed companies from emerging markets. In this way, the MSCI basically controls which countries are considered emerging markets and which are not, says Jan Fichtner, who researches power shifts in the financial industry.

Because the MSCI was about to exclude Peru from the “MSCI Emerging Markets”, the Peruvian finance minister flew in 2015
The station reported at the time that they were going to New York as quickly as possible to convince the managers otherwiseCNN.If Peru had no longer counted as a so-called emerging market, the consequences would have been fatal. In one fell swoop, billions would have flowed out of Peru's financial market, the share prices of Peru's most important companies would have crashed and, in the worst case, could even have gone bankrupt.

How did that end?

The finance minister emphasized the openness of the Peruvian markets and managed to convince the CEO of the MSCI to keep Peru in the index.

Okay, but what exactly is so new about it? There are certainly cases like this all the time when it comes to the World Bank or WTO indices.

In fact, the criteria are relatively similar to those used by the World Bank: how open the country's markets are to foreign capital, for example.
The big difference is that the World Bank and the WTO are international organizations in which representatives of all countries have, at least theoretically, a say. The index providers, on the other hand, are private companies whose decisions are not controlled by the public.

In thisPaperAnother example is described: In 2019, the MSCI passed a measure that allowed around $80 billion to flow into the Chinese financial market. In return, the Chinese government opened its markets more to investors - which may have been very difficult for them.

At the beginning we actually said that ETFs are a good thing for investors. Now I'm a little worried that I'm trusting the wrong people again by buying ETFs. Is my money in ETFs at least safe? What happens to ETFs in the event of a financial crisis?

There hasn't been a major financial crisis since 2008. But many experts were worried that ETFs could fuel such crises. Jack Bogle also didn't think much of ETFs until the end. He criticized the fact that ETF prices can shoot up or down sharply if investors are unsettled. This can be a problem, especially with complicated financial products. Also a report fromEuropean system of financial stabilitywarned of the systemic risks that ETFs can pose.

Okay, that really doesn't sound good?

In spring 2020, the ETFs were subject to a major stress test: the corona pandemic. You probably remember how everyone initially assumed that we were sliding into an economic crisis.

Oh me!

At that time, the US Federal Reserve pumped huge amounts of money into the financial markets, including into ETFs. In fact, ETFs were bought more than ever before. That means, at least in this first emergency, everything went well.

I need a conclusion from you now. I can invest in ETFs without hesitation?

ETFs may be a good investment strategy for you because they are relatively safe and stable.

But isn't it true that ETFs democratize stock trading?

No. They only encourage enormous shifts in power, the ultimate consequences of which no one yet knows.

Really no one? Warren Buffet always knows everything! Can you take a look into the crystal ball?

Even though passive funds are making up an increasingly larger share of the market, they are unlikely to completely take over it. Yes, classic investment funds are disappearing. But right now it looks like hedge funds are here to stay. So a balance is formed, a kind of dumbbell, in which the two extreme poles become larger. There is also much to suggest that ETFs will soon replace classic investment funds. No more Henri then! The US business mediumBloomberghas already crowned ETFs the new king of the financial industry.

Editor: Lisa McMinn, final editor: Susan Mücke, photo editor: Till Rimmele; Audio version: Iris Hochberger and Christian Melchert

How ETFs are changing the financial world, clearly explained


As someone deeply immersed in the world of financial markets and investment, it's evident that the article delves into the complexities and implications of investing in Exchange-Traded Funds (ETFs). The content covers various crucial concepts related to ETFs, passive investment strategies, and the dynamics of the financial industry. Let's break down the key concepts discussed in the article:

  1. Passive ETFs vs. Traditional Investment Funds:

    • The article introduces the distinction between traditional investment funds and ETFs. Traditional funds involve entrusting a fund manager, like "Henri," to make investment decisions. ETFs, on the other hand, are exchange-traded and provide real-time pricing, making them more flexible and transparent.
  2. Passive Investing and Index Funds:

    • The term "passive" in the context of ETFs refers to the investment strategy where the fund aims to replicate the performance of an external index, such as the S&P 500. This approach contrasts with active management, where a fund manager makes discretionary decisions.
  3. Evolution of ETFs:

    • The article touches upon the evolution of ETFs, noting that while the initial ETFs were mostly passive, there is now a diverse range, including actively managed ones like cannabis or bitcoin ETFs. However, the focus remains on passive ETFs due to their widespread popularity.
  4. Accessibility for Beginners:

    • ETFs are presented as an accessible entry point for beginners in the stock market. The ease of investing in ETFs through simple strategies like a savings plan is highlighted, making them an attractive option for those without extensive knowledge of stock markets.
  5. Democratization of Financial Markets:

    • The notion that passive ETFs democratize financial markets is introduced. However, the article raises a critical perspective, suggesting that while ETFs may empower individual investors, the concentration of power in a few large firms, such as Blackrock, may have undemocratic consequences.
  6. Influence of Large Asset Managers:

    • The narrative delves into the significant influence of large asset management firms, such as Blackrock, Vanguard, and State Street, on both financial markets and individual companies. These firms collectively hold substantial stakes in various corporations, impacting decision-making processes.
  7. Larry Fink and Blackrock's Influence:

    • Larry Fink, the CEO of Blackrock, is presented as a powerful figure with influence extending beyond the financial realm into the political landscape. Blackrock's role in advising governments during the financial crisis is highlighted, emphasizing its substantial impact on economic policies.
  8. Climate and Social Responsibility:

    • Larry Fink's advocacy for climate awareness and social responsibility is discussed. The article explores the potential influence of Blackrock and other major asset managers on companies' environmental and social initiatives through shareholder meetings.
  9. Machtverschiebungen (Shifts in Power):

    • The term "Machtverschiebungen" is used to describe the shifts in power dynamics within the financial industry, emphasizing the changing landscape and the growing influence of ETFs and large asset management firms.
  10. Role of Index Providers:

    • The role of index providers, such as MSCI, S&P Dow Jones, and FTSE Russell, is explained. These entities determine which companies make up major indices, impacting capital flows based on index inclusion or exclusion.
  11. Concerns and Risks:

    • The article briefly touches upon concerns and risks associated with ETFs, including the potential for market distortions during crises. Jack Bogle's skepticism about ETFs and their susceptibility to rapid price fluctuations is mentioned.
  12. Future Outlook:

    • The article concludes by discussing the potential future landscape of the financial industry, suggesting a balance between ETFs and traditional investment funds. The rise of ETFs is predicted to continue, potentially surpassing traditional funds in popularity.

In summary, the article provides a comprehensive exploration of ETFs, from their fundamental structure to their impact on financial markets and the broader economy. It offers a nuanced perspective on the democratizing potential of ETFs while acknowledging the concentration of power in the hands of a few major players in the industry.

How ETFs are changing the financial world, clearly explained (2024)


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