What is the Exchange-Traded Fund (ETF)
The first step to understanding what are ETFs is by starting with the definition of it. So what exactly is an ETF? ETF stands for an exchange-traded fund. Which is essentially a type of security that involves the collection of other securities such as that of stocks that often happen to track an underlying index. In simple words, one could say that ETFs are very much similar to mutual funds. However, one stark difference is mutual funds are listed on exchanges whereas ETF shares are mainly traded throughout the entire day just like an ordinary stock is traded.
Now it is very much important to remember that ETFs can contain numerous types of investments. Which could include stocks, commodities, bonds, or even a mixture of different investment types? Therefore, this shows that an exchange-traded fund is marketable security. This means to convey is the fact that it has an associated price point. That allows it to be bought and sold with ease. Also, remember that the price of all ETF’s shares will constantly keep changing throughout the trading day. This is mainly because the shares are always bought and sold on the market.
An ETF can potentially happen to own thousands of stocks across various different industries. Also, on the flip side of things, it could just stick to one particular industry or sector as well. Some funds focus on only U.S. offerings only whereas there are other types of funds that have a global outlook as well.
Various types of Exchange-Traded Fund that are available
There also happens to be not just one but various types of ETFs that are available to investors who can use these for their income generation goals. First, there’s the bond ETFs which always include government bonds, corporate bonds, and state and local bonds. Second, there are Industry ETFs. These particularly such to one industry only such as technology, banking, or the oil and gas sector. Third, there are commodity ETFs which as named happen to invest only in commodities which include crude oil and gold. Fourth, there are currency ETFs which, as you guessed happen to track major foreign currencies. Such as the Euro and the Canadain dollar. Lastly and fifth, there exists inverse ETFs which mainly attempt to earn gains via stock declines by shorting them.
Awareness on EFTs
Now in case of inverse ETFs only, investors should always be aware that many of them are Exchange Traded Notes aka ETNs and not ETFs in the true form. In the United States, ETFs are mostly always set up as open-ended funds and happen to be subjected to the Investment Company Act of 1940. Open-end funds happen to not limit the number of investors that can be involved in the product.
How ETFs can be traded
These exchange-traded funds aka ETFs can be traded through both online brokers as well as traditional broker-dealers. However, these days there also exists an alternative to most of these online and traditional standard brokers which are known as Robo advisors.
This brings us to the end of our discussion on ETFs. Now, do let us know if you have invested in ETFs yourself or you are thinking about doing so
