Types of ETFs

As the world of finance becomes more accessible, many more people are trying their hand at investing. Whether you’re a low-risk saver or are in it to win it, there are ETF investment options for everyone. 

If you’ve stumbled upon this article, you’re probably interested in learning a little more about investing, stocks, and ETFs. Keep reading to discover the basics of ETF stock investing. We’ll look at different types of ETF stocks, funds, and which stocks are best for your financial goals. 

1. What is an ETF?

“ETF” stands for Exchange Traded Funds. An ETF is an exchange-traded product that is traded on the stock exchange. An ETF is a type of investment that anyone with a savings account can purchase. You can buy and sell ETFs the same way you do any other regular stock on the stock exchange. 

ETF stocks are similar to mutual funds. The difference is that mutual funds are purchased at whatever price they are at the end of the stock trading day, while ETFs can be bought or sold throughout the day at a value that constantly changes. This fluctuating price means that shares change throughout the day, allowing investors to watch for the lowest price.

ETFs are “securities” structured to track the value of a specific or broad sector, an index, or a commodity. Products may be individual commodities, large or diverse collections of securities, or specific investment strategies. 

Eliminate late nights out – stay home. There’s time on the weekends to hang out with friends. However, Sunday evening through Thursday evening need to be spent preparing for the next trading day. Whether you use technical analysis or study the fundamentals, spend an hour before bed to mentally prepare yourself ready for the next trading day. Get to bed at the same time each night so you have plenty of rest.

2. Why Purchase ETFs?

What’s so great about ETFs, anyway? It’s a way of purchasing a piece of the pie, as the saying goes! Don’t have the cash to buy stocks of Tesla and Apple? Why not buy a bit of each most cost-effectively?

For example, Vanguard 500 Index Fund Investor Shares (VFINX) tracks 500 of the largest companies in the U.S. With a 500 Index fund, an investor’s portfolio is broadly diversified, lowering general risk and allowing them to benefit from some of the country’s most successful companies. 

Another popular market ETF and regular top pick is the Invesco QQQ (QQQ) which indexes the Nasdaq 100 and typically contains stocks in the sector of technology.

Are you concerned about putting all your eggs in one basket? Smart! An ETF stock will hold multiple underlying assets. Unlike regular stock funds, with ETF funds, your investment can contain a range of stocks, commodities, bonds, and other investment types, all wrapped up as “marketable security” in an easily sold-and-bought package. So, essentially, it’s like putting your eggs in a bunch of different, diversified “baskets.”

3. Benefits of ETFs

To sum it up, here are the main benefits of ETFs:

• Lower expense ratio
• Fewer broker fees
• A diversified portfolio and risk management
• Access to stocks across many different companies
• Easily bought and sold
• Fluctuating price (allowing you to purchase at the lowest possible cost)
• More cost-effective

Another advantage to exchange-traded funds is that they offer a lower expense ratio. That’s more dollars in your pocket and less to the guys running the show. ETFs typically have fewer broker commission fees than when buying a regular stock individually. 

4. Different Types of ETFs

Every new investor should be familiar with all the different exchange-traded funds. The following types of ETF stocks are available to any investors with a trade account. Investors use ETFs for price increases, income generation, speculation, or in an investor’s portfolio as a hedge or partly offset risk.

Here are different types of ETFs new and seasoned investors should know about:

• Bond ETFs – These include corporate and government bonds and local and state bonds, which are known as municipal bonds. Bond ETFs are “Fixed Income Funds” that track low-liquidity investment and are not actively traded in secondary markets. Bond ETFs are, however, still actively traded by brokers and can offer good opportunities in the bond market alongside the benefits of ETF trading.
• United States Market ETFs – Active ETFs that track a major market index. There are also Foreign Currency ETFs for investing in currencies other than USD, such as CAD and Euros.
• Inverse ETFs – These ETF stocks are used to “short stocks,” which means to earn gains through stock declines. For example, an investor will sell a stock when expecting a decline in value and then repurchase it at a lower price. 

Keep in mind that Inverse ETFs are not true ETFs, however. They are ETNs (Exchange-traded notes), bonds traded like stocks but backed by banks.

• Sector and Industry ETFs – These are used to track a specific industry. An Industry ETF can track banking, technology, oil, and gas, etc. These can be helpful for investors who want to gain knowledge and investing experience in a particular field. The benefit of Industry ETFs is that an investor can diversify within a specific sector or field without purchasing stocks or shares from individual companies. 
• Commodity ETFs – For investment in commodities such as gold, energy, or crude oil. Keep in mind that the name can be misleading! You’re not buying a physical commodity, but derivative contracts are used to follow the underlying commodity’s cost.
• Leveraged ETFs – From the controversial side of ETF trading, leveraged ETFs are better for advanced traders. Those who know what they’re doing, leveraged ETFs can produce more significant annual returns based on the daily returns of underlying indexes and assets. Keep in mind that these returns are never a “sure thing” and increase the investment risk.
• Actively Managed ETFs – Which are better: ETFs or mutual funds? The Actively Managed (AM) ETFs are for those who still feel unsure. These ETFs combine both’s benefits into an asset without the disadvantages of either ETFs or mutual funds. AM ETFs aren’t something done in amateur circles and require a knowledgeable broker. 
• Innovative ETFs – A crop of funds caused by growing ETF popularity, such as Volatility ETFs and Tax-Deferred ETFs. Different variations of ETFs will continue to occur as the stock market shifts and changes.
• Dividend ETFs – These consist of diverse ranges of stocks that pay dividends. A dividend is a distribution of profits to shareholders when a corporation earns profits. (Basically, it’s a share of the surplus from the company that you own a piece of – a.k.a it’s not a gift, you earned it!). Keep in mind that market caps can segment dividend stocks. 

ETFs are typically an excellent place to start for those who are new to investing. New investors benefit from the range of investment choices, risk management, diversification, low investment threshold, and low expense ratios.

5. How to Buy ETF Stocks

Now that we’ve gone over what are ETFs and types of ETFs, we’re ready to buy! Here’s how you can add ETF stocks to your portfolio. 

ETFs are traded through brokers online as well as traditional broker-dealers. Put some research into finding the right broker for your needs and goals. New investors can also consider virtual “Robo-advisors” and user-friendly trading apps.

Tip: Never invest more than you’re comfortable parting with. Remember that while ETFs are typically a safer bet in the investing world, it’s always possible to experience a crash and lose your funds. 

Final Thoughts on ETFs

When starting an investment journey, the first step is to research. Figure out what type of ETF stocks make sense for your budget and goals. The second step is finding the right broker or platform for trading (buying and selling stocks). After that, it’s all about picking and choosing indexes that align with your goals!

Hitting “buy” on your very first stock is a big moment. It’s the start of diversifying your income, investing, and planning for an elevated future. Are you still worried about all those eggs in your basket? Just remember, you can’t make an omelet without cracking a few!

Good luck and may the trading gods look upon you favorably!

“It certainly appears that there have been structural shifts in the labour market across the industrialised world with the result that wages are less responsive for any given rate of unemployment.”

-Adam Smith

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