An ETF or Exchange-Traded Fund is a type of investment fund holding assets including stocks, bonds, foreign currency, or commodities. ETFs are traded similarly to stocks at fluctuating prices throughout the trading day. They usually track indexes including the Dow Jones, the Russell 2000, the S&P 500, and the Nasdaq. Keep reading to understand all about What is an ETF.
ETF investors are not the direct owners of underlying investments. Instead, they have an indirect claim. They are also entitled to a part of the residual value in the case of fund liquidation and the profits. Their ownership interest or shares can also be readily sold and purchased in the secondary market.
Different Types of Exchange-Traded Funds
The following are some of the most common types of ETFs:
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Actively Managed ETFs
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An investment team or manager handles these ETFs and decides the portfolio assets’ allocation. Their active management means their portfolio turnover rates are higher than index funds, for instance.
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- Bond ETFs
These ETFs are exclusively invested in bonds and other types of securities with fixed incomes. These might be focused on a certain type of bond or provide a broadly diversified portfolio of different types of bonds with different maturity dates.
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- Commodity ETFs
Commodity ETFs hold physical commodities like precious metals, natural resources, or agricultural goods. Some commodity ETFs might also combine investments in physical commodities with relevant equity investments.
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- Currency ETFs
These are ETFs invested in one basket of several currencies or a single currency. These are often extensively used by those investors who want to be exposed to the forex market without making direct trading of futures in it. These ETFs often track the most common internal currencies like the US dollar, British pound, Japanese yen, Euro, and Canadian dollar.
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- Index ETFs
These ETFs copy a particular index, like the S&P 500 Index, covering certain sectors, particular stock classes, or emerging or foreign market equities.
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- Inverse ETFs
Inverse ETFs are made by using different derivatives to acquire profits via short selling if there is a broad market index or decline in a group of securities’ value.
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- Leveraged ETFs
These ETFs are mostly made up of financial derivatives that provide an ability to leverage investments and potentially increase gains. These are often used by speculator traders who want to make the most out of short-term trading opportunities in the major stock indexes.
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- Real Estate ETFs
Real estate ETFs are funds invested in REITs or real estate investment trusts, real estate development companies, mortgage-backed securities, and real estate service firms. These might also hold actual physical real estate, which can range from large commercial properties to undeveloped land.
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- Stock ETFs
These ETFs hold a certain portfolio of stocks or equities and resemble an index. These can also be treated similarly to regular stocks since these can be bought and sold for a profit. Stock ETFs are also traded on an exchange during the trading day.
Why Invest in an ETF
Investing in an ETF comes with several benefits such as:
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- Lower transaction fees and costs
- Accessibility to markets
- Transparency
- Price discovery and liquidity
- Tax efficiency