Exchange-Traded Funds (ETFs)
An ETF is an exchange-traded fund because it is exchanged on a stock exchange, much like stocks. The value of an ETF's shares fluctuates during the trading day as they are purchased and sold on the market. In contrast, mutual funds are not traded on an exchange and trade only once each day after the markets shut. Furthermore, as compared to mutual funds, ETFs are more cost-effective and liquid.
TYPES OF ETFs
Passive and Active ETFs
ETFs are classified as either passive or actively managed. Passive ETFs seek to mirror the performance of a larger benchmark—either a diversified index like the S&P 500 or a more specialised focused sector or trend. ETFs, both passive and active
Actively managed ETFs do not normally track an index of securities, but rather rely on portfolio managers to decide which assets to include in the portfolio.
Bond ETFs
Bond ETFs are utilised to give investors with consistent income. Their income distribution is influenced by the performance of the underlying bonds. Government bonds, business bonds, and state and local bonds (known as municipal bonds) may all be included.
Currency ETFs
Currency ETFs (exchange-traded funds) are pooled investment vehicles that track the performance of currency pairs that include both domestic and foreign currencies. Currency ETFs fulfil several functions.
Stock ETFs
Stock (equity) ETFs are a collection of stocks that track a specific industry or sector. A stock ETF, for example, could track automotive or foreign stocks. The goal is to provide diverse exposure to a particular industry that includes both excellent performers and new entrants with development potential.
Industries/Sectors ETFs
ETFs that focus on a single industry or sector are known as industry or sector ETFs. An energy sector ETF, for example, will include companies in that industry. The objective behind industry ETFs is to acquire exposure to the upside of a specific industry by following the performance of companies in that field.
Commodity ETFs
As the name implies, invest in commodities such as crude oil or gold. Commodity ETFs offer several advantages. For starters, they diversify a portfolio, making it easier to hedge against market downturns. Commodity ETFs, for example, can provide as a buffer during a stock market downturn.
Inverse ETFs
Inverse ETFs aim to profit from stock falls by shorting stocks. Shorting a stock means selling it with the expectation of repurchasing it at a cheaper price. In order to short a stock, an inverse ETF employs derivatives.
A leveraged ETF tries to outperform the underlying investments by a factor of two or three. For example, if the S&P 500 grows 1%, a 2 leveraged S&P 500 ETF will rise 2%. (and if the index falls by 1%, the ETF would lose 2%).