Do you wonder what ETFs are? ETFs are exchange-traded funds. They’re baskets of securities bought or sold through brokerage firms on stock exchanges. ETFs get offered in nearly all classes of assets, ranging anywhere from traditional investments to assets such as currencies and commodities.
Exchange-traded funds might be one of the more crucial and even valuable products that individual investors have seen created for them in recent years. ETFs provide quite a few benefits, and when used right, can be a tremendously powerful way for an investor to meet his investment goals.
In short, an ETF is a basket of multiple securities that you can both buy and sell through your brokerage firm on any applicable stock exchange. ETFs are available in just about any asset class you can conceive of, starting with traditional investments in currencies and commodities. Additionally, there are very innovative ETF structures which let investors do things like avoiding capital gains taxes in the short-term, gain leverage or even short particular markets.
After a few false starts, ETFs started in earnest back in 1993. The product then was usually known as SPY, the ticker symbol for “Spiders”. It wound up becoming the highest-volume ETF of all time. At the time of writing in 2018, there were an estimated trillion dollars invested into ETFs, with roughly a thousand individual ETF products being traded on various American stock exchanges alone.
The Many Kinds Of ETFs:
Market ETFs: These are designed to track a certain index, such as the NASDAQ or S&P 500.
Bond ETFs: These are designed to provide investors exposure to nearly every kind of bond that is available simultaneously, including international, corporate, municipal, high-yield, U.S. Treasury, and much more.
Industry/Sector ETFs: These are designed to give investors exposure to certain industries, like high technology, pharmaceuticals, or oil.
Commodity ETFs: These are designed to follow prices of particular commodities, like corn, oil, or gold.
Style ETFs: These are designed to track a particular market capitalization focus or even an investment style, like small-cap growth or large-cap value.
Foreign Market ETFs: These are designed for tracking markets outside the United States. Common examples might be Hong Kong’s Hang Seng index or the Nikkei index of Japan.
Inverse ETFs: These are designed to profit from declines in an index or underlying market.
Actively-Managed ETFs: These are designed to outperform an index, which is different from most ETFs, which are intended to instead track the index and match or follow it.
Exchange-Traded Notes: Essentially, these are debt securities which are backed by the issuing bank’s creditworthiness and created to give investors access to illiquid markets with the additional advantage of not generating short-term capital gains taxes.
Alternative-Investment ETFs: Innovative structures like ETFs allow some investors to trade things like volatility itself or even gain some exposure to certain investment strategies likes covered call writing or currency carry.
The ETF industry is less than a quarter of a century old. With time, more and increasingly unique ETFs are going to get introduced in the coming years. Innovation usually proves to be positive for investors, but they need to know that not every ETF is the same. Investigate carefully prior to investing in any possible ETF, weighing all factors as you try and reach your investing goals.
