Understanding the Different ETF Types
Updated on 23 Feb 2020
ETFs or Exchange Traded Funds are investment funds listed and traded on global indices, just like stocks. In this article you will understand the difference between different types of ETF and their benefits.
As an investor, you must select the funds that suit your investment goals the most, in order to make the most out of your investment. Though you may have chosen to invest in ETFs, the decision-making process does not end here as there are different types of ETF that you must consider. In this article, we will take you through some of the most sought-after types of ETF and how they can help you meet your investment goals!
As most ETFs tend to track equity indexes or sectors, this is the most common type of ETFs you’ll find when sifting through all your options. These ETFs can either mimic a collection of stocks that are grouped by geographical location, sector, or any other common feature, or they can mimic a single index, such as S&P 500. A single share in a stock based ETF buys you a nominal amount of each company that these stocks track, and can be managed either actively or passively.
Many financial advisors believe that each investor should include bonds in their portfolios, irrespective of their risk appetite or age. Broad market bond ETFs tend to cover the entire market while bond sector ETFs only focus on specific types of bonds such as the Treasury Bond, international sovereign obligations of foreign nations, or corporate debt.
The following are a few of a top bond ETFs that you can consider investing in:
1. Schwab U.S. Aggregate Bond ETF
With an expense ratio of only 0.04%, the Schwab U.S Aggregate Bond is the cheapest bond that’s available in the market. This bond tracks the Bloomberg Barclays U.S. Aggregate Bond Index, which includes a range of US based taxable bonds such as corporate bonds, mortgage bonds, US treasuries and government bonds.
2. Vanguard Long-Term Bond Index Fund ETF
Known to offer a high yield, these bonds are also known for having a very volatile price, making them apt only for investors who have a high risk profile. This bond tracks the Bloomberg Barclays U.S. Long Government/Credit Float Adjusted Index.
3. Vanguard Total International Bond Index Fund ETF
This bond tracks the Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index and is known for investing in international currencies and not the US Dollar. Investors looking to diversify their portfolio with international investments should consider this option.
Industry based ETFs are funds that track a specific sector or an industry, such as Tech. In fact, Tech ETFs have been consistently performing very well when compared with other industry based ETFs. Having said that though, their total risk index stands around 1.46%, making this a volatile fund that’s more appropriate for investors with large risk appetites. Don’t let that dissuade you too much, as technology stocks tend to hold 23% of the total market weight of the S&P 500 index, which is the highest percentage seen since the tech bubble of 2000.
Over the last 5 years, the following tech ETFs have performed brilliantly:
Financial ETFs track the performance of an international currency and are ideal for investors who do not want to place all their faith in the dollar. Investors can profit from the moves that occur in foreign currency compared to the US dollar.
According to the experts at wall street, the following are the top 10 Financial ETFs that new investors can consider looking into:
- PowerShares Dynamic Financial ETF (NYSEArca: PFI)
- PowerShares S&P Small Cap Financials (NasdaqGM: PSCF)
- First Trust Financials AlphaDex ETF (NYSEArca: FXO)
- SPDR S&P Regional Banking ETF (NYSEArca: KRE)
- SPDR S&P Bank ETF (NYSEArca: KBE)
- PowerShares Global Listed Private Equity ETF (NYSEArca: PSP)
- SPDR S&P Insurance ETF (NYSEArca: KIE)
- iShares Dow Jones U.S. Financial Sector Index ETF (NYSEArca: IYF)
- Vanguard Financials ETF (NYSEArca: VFH)
- SPDR Financial Select Sector ETF (NYSEArca: XLF)
Commodity ETFs are tied to the performance of a specific asset such as gold, petroleum, and so on. However, what you must understand is that when you’re investing in this type of ETF, you aren’t actually buying the commodity itself. Instead, you’re buying derivatives contracts. The buying and selling of these contracts depends in the way you hedge your risk, and these definitely do require a certain amount of active management.
Investing in ETFs comes with a lot of benefits for new investors as these funds do not require management, come with added costs and are more liquid than, say, mutual funds. This is definitely a great avenue to explore to begin your investment journey! Just ensure you choose wisely from the different types of ETF on offer, and if you run into any issues do let us know at firstname.lastname@example.org. Happy investing!
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