Diversification is an essential component of life; the same is true with financial instruments! Typically, there are thousands of Exchange Traded Funds(ETFs) in the market to invest in, which have several hundred types of underlying assets that the fund mimics.
These ETFs can be used to grow wealth, counter adverse speculations, offset inflation risks, or maybe hedge your portfolio.
Types of ETFs
1. Bond ETFs
Bond ETFs are also called Fixed Income ETFs. The reason for the name is that the ETF invests the money in various fixed-income instruments like government bonds, corporate bonds, etc.
These securities have a fixed percentage return over time and have very high stability. Hence several professionals invest in such ETFs to have a steady flow of unhindered income. People often use such funds to hedge the volatile parts of their portfolios.
For instance, iShares Core U.S. Aggregate Bond ETF, Vanguard Total Bond Market ETF, Bharat Bond ETF, etc., are some ETFs that invest your money into fixed-income instruments.
2. Equity ETFs
Equity Exchange Traded Funds generally track indices in the equity sector of the financial market. These ETFs track several sectors or industries and try to replicate their growth in the fund’s performance.
One can choose ETFs covering large businesses or small businesses, etc. For instance, if an ETF covers the banking sector, it will hold stocks of firms working in the banking sector. Thus, it will help the fund mimic the growth path of the banking sector.
Now, the fund doesn’t need to have only the firms from a single country; stocks from around the globe can also be underlying securities in an ETF. Composition depends on what ETF you choose. Unlike holding actual stocks, such ETFs do not involve actual ownership of securities.
Examples of such ETFs are ICICI Prudential NIFTY ETF and SBI ETF, listed on the Indian markets. In the USA, SPDR S&P 500 ETF Trust and SPDR Dow Jones Industrial Average ETF Trust are traded.
3. Commodity ETFs
Commodities are often very pricey compared to stocks and thus are often inaccessible to the commoners. What’s the solution? – Owning a commodity ETF! Such ETFs are a great way to get hold of commodities like gold, silver, and other commodity derivatives like Crude Oil, Natural gas, etc.
Commodity ETFs have a lot of advantages in this particular section of the financial market. ETFs make the commodity accessible at meager costs rather than owning the derivatives or commodities.
They may also combine several products into one to hedge for any unforeseen downturns. Invesco D.B. Commodity Index Tracking Fund, KraneShares Global Carbon Strategy ETF, Axis Gold Fund, etc., are a few examples of commodity ETFs.
4. Currency ETFs
Currency ETFs generally track the movement of either a single currency or a basket of currencies bundled together. The ETFs can either hold the underlying cash directly or could use currency derivatives instead.
An investor generally buys such an ETF when he knows that the currency will appreciate or wants to hedge his portfolio against volatility. More often than not, some ETFs that hold overseas assets do hedge for currency fluctuations.
Wisdom Tree Indian Rupee Strategy Fund, Invesco D.B. U.S. Dollar Index Bullish Fund, ProShares UltraShort Yen, etc., are a few examples of currency ETFs.
5. Factor ETFs
The power of capturing the factors is often called smart beta. Factor investments revolve around targeting a specific factor return across several asset classes.
Institutional investors and fund managers have been using elements to manage portfolios for ages.
ETFs have helped to transform how investors access these historically rewarded tactics. Now, these ETFs can target a single factor or multiple factors depending upon the strategy of each ETF.
A few examples of factor ETFs are JPMorgan U.S. Value Factor ETF and iShares Edge MSCI World Multifactor UCITS ETF.
6. Speciality ETFs
These ETFs need specific ETFs and several different types of specialty ETFs have been floating in the market recently. Most prominent among those are inverse funds, Leveraged funds, sustainability funds, etc. Such types of ETFs are generally risky.
Inverse ETFs usually go up when the underlying index goes down, similar to short selling by investors. Some examples of inverse ETFs are ProShares UltraPro Short QQQ and AdvisorShares Ranger Equity Bear ETF.
On the other hand, Leverage funds borrow money for each penny or a quantum of the amount invested in growing your return. For example, 2X ETF will borrow an extra $1 for every $1 you put into the fund.
Direxion Daily CSI 300 China A Share Bear 1X Shares, Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares are a few examples of leveraged ETFs. We will learn more about these ETFs in the coming time.
Which ETF to invest in all depends on the investor. Investment goals and risk appetite are the main drivers of choice. An investor needs to recognize the risk-return ratio of every ETF available in the offing.
FAQs
What are some good equity ETFs to invest in?
Some of the ETFs, according to Morningstar’s U.S., are – Dimensional US Core Equity 2 ETF DFAC, Dimensional US Core Equity Market ETF DFAU, iShares Core S&P 500 ETF IVV, etc.
Which one is better to buy – a bond or a bond ETF?
Both investment options have their pros and cons depending on the investor. However, you can opt for bond mutual funds if you’re looking for active management, as they offer more choices. If you are planning to frequently buy and sell, then bond ETFs would be a better choice.
Which ETF offers the best returns?
Here are some top ETFs offering good returns – Vanguard Growth ETF (VUG), iShares Morningstar Mid-Cap Growth ETF (IMCG), Vanguard S&P Small-Cap 600 Growth ETF (VIOG), etc.
