Exchange-traded funds (ETFs) have been around for quite some time, but only recently have they become popular with investors. A lot of people don’t know about ETF investing, and even those who do can be confused by all the different types there are to choose from.
As experts at SoFi suggest, “ETFs are a popular way to achieve relatively cheap and easy portfolio diversification within an investment strategy”. Here is the breakdown of four main types of ETFs so that you can decide which is right for you.
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Equity-based Exchange-Traded Funds
Equity-based ETFs are the most popular type of ETF. They are also called stocks because they hold shares in company stocks.
An equity fund holds a basket of stocks that it follows. For example, if you want an investment that tracks the S&P 500 Index (the 500 largest companies listed on the New York Stock Exchange), a stock ETF would buy those stocks and keep them in proportion to their weighting in the index.
Unlike mutual funds, which have a manager who decides what securities to buy and sell in order to meet performance goals, an equity ETF simply buys or sells its underlying assets at whatever price is offered on any given day by its counterparties. This automatic execution minimizes human error—and thus maximizes returns—without charging high fees for management services as do many actively managed mutual funds.
Bond-based ETFs are a good way to invest in bonds. They’re similar to bond mutual funds, but with a couple of key differences:
- They can be bought and sold throughout the day on an exchange—not just during normal trading hours.
- You can buy them through your broker, instead of having to invest directly with an investment company. This makes it easier for individual investors who want to get started quickly with this type of investing.
A commodities-based ETF is an investment vehicle that allows you to gain exposure to the commodities market without having a lot of money. For example, if you want to invest in gold but don’t want to buy and store physical gold bullion, a commodities-based ETF gives you indirect exposure to that asset class by giving you shares in an investment pool that holds the actual bullion for you.
The main advantage of this type of fund is its low cost; since it’s not dealing with high volumes of physical goods, it can afford lower share prices and higher yields than other funds like mutual funds or index funds would be able to provide.
A currency-based ETF is a type of investment that allows you to trade on the stock market. Currency-based ETFs are based on a basket of currencies and can be used as hedges against currency risk.
Currency-based ETFs are traded on the stock market like any other share, but they don’t represent ownership in any specific company or asset as such; instead, their value depends entirely on the performance of their underlying assets (in this case, currencies). These funds allow investors to profit from changes in foreign exchange rates without having to buy large amounts of individual currencies.
At the end of the day, there are many different types of ETFs to choose from. While they may not all seem similar at first glance, they each have unique benefits and drawbacks that make them more or less appropriate for certain situations. By taking a closer look at their features, users can determine which type best fits their needs and avoid unnecessary investment mistakes in the process.