What are ETFs or exchange-traded funds? Meaning

Business

DEFINITION

An exchange-traded fund (ETF) is a type of security that involves a collection of securities, such as stocks, that often tracks an underlying stock market index, although they can invest in any number of industry sectors or use a variety of strategies. ETFs are in many ways similar to mutual funds; however, they are publicly traded and ETF shares are traded around the clock just like ordinary shares.

A well-known example is the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index . These funds can contain many types of investments, including stocks, commodities, bonds, or a combination of investment types. An exchange-traded fund is a marketable security, which means that it has a price associated with it that allows it to be easily bought and sold.

Most ETFs can be acquired through investment management companies such as BlackRock or Vanguard, which handle the most desirable and profitable ETFs on the market. We can also buy ETFs from most brokers, such as eToro , which provides exposure to ETFs by buying their units or allowing trading through trading instruments such as CFDs or contracts for difference. In contracts for difference, an investor buys ETFs with leverage or sells ETFs while waiting for their value to decrease.

KEY IDEAS

An exchange-traded fund is a basket of securities that are traded on an exchange, just like a stock.

The share prices of these types of funds fluctuate throughout the day as they are bought and sold; This is different from mutual funds that only trade once a day after the market closes.

They can contain all types of investments, including stocks, commodities, or bonds; some offer US-only stakes, while others are international.

They offer low expense ratios and fewer broker commissions than buying the stocks individually.

ETF FEATURES

An exchange-traded fund is called an exchange-traded fund, as it is traded on an exchange just like stocks. The price of shares in an exchange-traded fund will change during the trading day as shares are bought and sold on the market. This is different from mutual funds, which are not traded on an exchange, and are only traded once a day after the markets close. Also, ETFs tend to be more profitable and more liquid compared to mutual funds.

This instrument is a type of fund that holds multiple underlying assets, rather than just one as a stock. Because there are multiple assets within an ETF, they can be a popular choice for diversification.

These funds may own hundreds or thousands of shares in various industries, or they could be isolated from a particular industry or sector. Some funds focus only on US offerings, while others have a global perspective. For example, banking-focused ETFs would contain stocks from several industry banks.

ETF TYPES

There are several types of ETFs available to investors that can be used to generate income, speculation, price increases, and to partially hedge or offset risk in an investor’s portfolio. Below are several examples of ETF types.

  • Bond : These can include government bonds, corporate bonds, and state and local bonds, called municipal bonds.
  • Industry or Stock – They track a particular industry, such as technology, banking, or the oil and gas sector.
  • For raw materials they invest in raw materials such as crude oil or gold.
  • Currencies: They invest in foreign currencies such as the euro or the Canadian dollar.
  • The inverse ones, who try to profit from the decrease in the price of the shares, by selling them short. Selling is short is selling a stock, expecting a decrease in value, and buying it back at a lower price. As we mentioned initially, these types of operations can be carried out using CFDs.

Investors should note that many reverse exchange funds are exchange-traded notes (ETNs) and not true ETFs. An ETN is a bond, but it trades like a stock and is backed by an issuer like a bank. Be sure to check with your broker to determine if an ETN is the right security for your portfolio.

In the US, most exchange-traded funds are set up as open funds and are subject to the Investment Company Act of 1940, except where subsequent rules have changed their regulatory requirements. Open funds do not limit the number of investors involved in the product.

SOCIALLY RESPONSIBLE ETFS

The ETFs that have been gaining the most popularity lately are those that invest in sustainable stocks and companies. Concern about climate change has led to this category expanding and gaining more and more followers. The JustETF page provides an appropriate selection of socially responsible ETFs that anyone can choose to invest in.

Leave a Reply

Your email address will not be published. Required fields are marked *