Date

Spring 2017

Document Type

Honors Project

Department

Finance

First Advisor

Evgenii Radetskii

Second Advisor

Vincent Kling

Abstract

This paper is to serve as an investor’s guide to understanding the exchange-traded fund industry, where both the benefits and risks of these investment vehicles are presented. There will be a general overview of what an exchange-traded fund is, why it was created, how it was created, and why it is different from other similar types of investment products on the market today. There are many benefits that exchange-traded products offer investors, both institutional and retail, however, there are also risks associated with this industry. The Flash Crash of May 6, 2010, serves as an example for when a sophisticated market system fails to deliver. From research I have gathered, it appears that exchange-traded products were partially to blame for this failure, and will be looked at more closely to discover if there are any potential systemic risks that this investment vehicle may cause in the future.

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