Exchange-traded funds (ETFs): features and types

What are Exchange Traded Funds (ETFs) and what are they for?

05 Dec, 2019 Endy Callahan

Exchange-Traded Funds (ETFs) are exchange-traded investment funds, their securities can be bought or sold on the stock exchange like stocks. This is the key difference between ETFs and mutual funds (they are not traded on exchanges). The value of the stock changes continuously since the asset is an exchange product. Let's review the specifics  of this tool closer.

Distinctive Specifics of ETFs 

Typically, an ETF has a lot of liquidity, and the company charges a low commission for its management (it is much less than that of mutual funds). This feature makes the tool attractive enough for investment.

For example, a bidder intends to purchase bonds of several states or issuers, but he does not want to understand the specifics of each paper. It’s simple to solve the problem - you just need to buy ETFs on bonds (these can be stocks, cryptocurrencies, etc.). Moreover, a wide choice is available - whether there will be bonds of a certain state, a group of countries or a separate economic sphere. The situation is similar with stock ETFs.

ETF is a collection of securities, not a single asset. Therefore, when buying it from the investor, a diversified portfolio appears, which is managed by professional financiers. An investor just needs to purchase securities of this index fund through a broker.

Over $ 3 trillion has been invested in the global economy through ETFs. More than 270 providers of this tool work in the world. The first - Toronto Index Participation Fund - offered its services back in 1990. Over time, US funds began to include the bonds of S&P 500, NASDAQ-100 and the Dow Jones index. In the article What is Bitcoin-ETF you can read about the features of the fund for cryptographic currencies. 

Core ETF Types: 

  • Commodity. This group of funds aims to track specific agricultural and commodity assets. Commodity ETFs may involve the direct purchase of an asset or include derivatives in the balance sheet. The purpose of the latter is to smooth out the effect of price fluctuations on the underlying asset. For example, ETF for gold is an excellent alternative to opening a bank account for precious metals.
  • Index. This type follows the structure of an index. In other words, the fund buys and sells securities based on the weight of the organization in the index. With its increase, the number of company securities in the portfolio increases. Large index funds have low commissions. So, SPY takes only 0.09% for its management services.
  • Inverse. Traditional ETFs do not allow you to earn on lowering the value of assets. When using inverse funds, the investor limits his losses only to invested funds.
  • Industrial. ETFs are either manufacturing or sector. Their feature is that the fund includes business papers of one sphere. Thus, an investor can concentrate in his hands the shares of the pharmaceutical or industrial sector. Typically, the composition of companies in such ETFs is selected in detail, which saves the client time.

The popularity of exchange-traded investment funds is not accidental. Many investors seek to shift their fund's management to specialists, pay them a small percentage and not be distracted from their affairs. Why don't you consider participating in an ETF? Some instruments are free to enter even if you have a small amount of money!