Learn About ETFs – Types, Advantages and More
Launched in America in 1993, an exchange-traded fund or ETF refers to a collection of securities such as bonds, shares, money market instruments, and more that traders can buy or sell through a top online stock broker or directly on exchanges.
In this blog, we cover what Exchange-traded funds or ETFs are, ETF types, how to choose the best ETFs, and more.
ETFs could be the best alternative to mutual funds if the investor is looking for a relatively risk-free investment. ETFs offer a low expense investment solution to day traders. Unlike mutual funds, in which investors can buy or sell only once per day, ETFs can be traded throughout the day on organized stock exchanges.
Day traders can buy ETFs with trustworthy online trading companies that offer stock trading.
Advantages of Exchange Traded Funds (ETFs)
With ETFs, investors can build a diversified portfolio across a group of equities, diverse industries, sectors, styles, or countries.
ETF has the trading liquidity of equity and can be purchased on margin and sold short. Unlike open-ended mutual fund that is priced at the end of the day based on the net asset value, ETFs trade at a price that is updated throughout the day. Just like a stock, ETFs allow managing risk by trading futures and options.
Compared to traditional mutual funds that involve costs such as a management fee, shareholder accounting expenses at the fund level, and other service fees, ETFs have much lower expense ratios. Traders can also buy a diversified portfolio with the same low commission as a stock.
ETFs also provide advantages for position sizing or allow purchasing in small amounts, making it a less risky investment option.
Being passively managed, ETFs may not have high capital gains and the owners will earn the income each year. This helps investors to have more control over their incurred taxes. In the case of mutual funds, the distribution amount is made based on the proportion of the holders' investment and is taxable.
Types of Exchange Traded Funds (ETFs)
There are several types of ETFs available to meet the demands of almost all traders.
This ETF type provides exposure exclusively to different types of bonds. It holds a portfolio of bonds with particular strategies. This helps promote market solidity by adding liquidity and transparency.
Less transparent than index or stock ETFs, commodity ETFs use gold, silver, copper, nickel, wheat, coffee, or any other commodities as underlying assets. Instead of directly owning the underlying assets, investors can use derivatives.
Currency ETFs will invest in either a single currency or a basket of currencies. Investors can participate in currency market transactions, even without purchasing a specific currency. Traders can invest in the currency directly, use derivatives or combine both.
Specialty ETFs such as leveraged funds and inverse funds offer much greater growth potential but are also of much higher risk. Inverse ETFs include stocks that are likely to decline in value, you can then sell these shares and re-buy them at a lower price point.
Leveraged funds that involve financial derivatives such as CFDs, futures and options may be suitable for short-term trading but can lose value quickly over longer periods of time based on market volatility and the directional trading of the index.
These ETFs are one of the simplest ways to trade gold. Unlike futures, gold ETFs don't expire. Investors have options to trade the price of gold, or trade an ETF related to gold producers, without purchasing physical gold.
Here, the investors gain exposure to numerous securities in a single transaction. Index ETFs can cover U.S. and foreign markets, specific sectors, or different asset classes. They are further subdivided into replication and representative ETFs. Replication ETFs are index funds that invest entirely in the securities underlying the index, but representative ETFs invest a majority of their fund corpus in representative samples and other securities such as futures and options.
While choosing ETFs, consider factors such as liquidity, level of assets, trading activity and volume, underlying index or asset, market position, and more. ETFs are used by many investors to build a portfolio or gain exposure to specific sectors. Day traders can rely on an online trading service provider to trade these investment funds.
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