What is an ETF?

ETF funds are a kind similar to mutual funds if compared with their structure, regulation, and management. Moreover same as Mutual fund, they are a pooled investment vehicle which offers diversified investment into various asset classes like stocks, bonds, commodities, currencies, options, or a blend of these. They can even be traded like stocks on the stock exchanges.

Types of ETFs:

Equity ETFs:

Equity ETFs track an index of equities. You can choose ETFs which covers large businesses, small businesses, or stocks from a specific country. Equity ETFs allows you to target sectors that might be doing well at that time like tech stocks or banking stocks, which makes them a popular choice.

Bond/Fixed Income ETFs:

These are typical ETFs which are designed to provide exposure to different types of bonds. Making Investment in bonds is a nice way to mitigate the ups and downs of investing and diversifying a portfolio.

Commodity ETFs:

Usually it is harder to access commodities than stocks, ETFs are a great way to get into commodities like gold, silver or oil. Commodities are an attractive alternative to stocks to diversify your portfolio and risk further. Moreover commodity ETFs can be less transparent than index or stock ETFs. Commodity ETFs offers investors the path to hold claims in the bullion market without making it necessary to purchase the commodity.

Currency ETFs:

Currency ETFs makes an investment in either a single currency, like the US dollar, or a basket of currencies. The ETF will either invest in the currency directly, use derivatives or a mix of the two. Adding derivatives can lead to more risk to the ETF, hence you need to make sure on what you’re buying. You can buy a currency ETF if you thought the underlying currency is likely to strengthen or if you wanted to protect or hedge your investment portfolio. Some ETFs that invest in overseas markets may already ‘hedge’ against currency risk.

Specialty ETFs:

There are two types of ETFs that have emerged in recent times to meet specific needs. They are leveraged funds and inverse funds. These specialty ETFs offers much greater growth potential but also has a much higher risk.

• Inverse ETFs – In Inverse ETFs, funds go up when the target index goes down just similar to investors short-selling a stock as its price falls.
• Leveraged ETFs – In Leveraged ETFs, funds aim to maximize returns by borrowing more money (leverage) to invest. You will recognize these ETFs as they typically say by how much they are leveraged, for example, 2X will borrow an extra $1 for every $1 investors put into the fund.

Both of these ETFs give high returns also bear high risk, so make a good study of them and know what you’re buying.

Factor ETFs:

It is an investment approach which involves targeting specific drivers of return across asset classes. Active managers and Institutional investors have been using factor ETFs to manage portfolios for decades. A common way to access factors is through rules-based ETFs which is often referred to as “Smart Beta”.

Sustainable ETFs:

Sustainable ETFs means investment which combines traditional investment approaches with environmental, social and governance insights. The range of sustainable ETFs available is growing rapidly. Sustainable investing is growing across a wide range of investors. The demand for sustainable ETFs is being driven by trends in demographic shifts, government policies and evolving views on risk.

Benefits of ETFs:

Final words:

As already discussed, ETFs are used by investors who wish to build a portfolio or gain exposure to specific sectors. They are just like stocks in the way they trade but can also be compared to more broad investments, or even entire indexes, in their price movements. If compared to other managed funds such as mutual funds, they show many advantages.

Every coin has two sides, In the same way ETFs has few disadvantages too. When it comes to diversification and dividends, the options may be very much limited. 

ETFs are one of the fastest-growing financial products in history. Now since you are armed with the basics of exchange-traded funds, you can take decision on whether they make an entry in to your portfolio.