Nowadays there are a plethora of investments and investment strategies that you can adopt to meet your investment objectives and long term financial goals. Exchange traded funds (ETFs) are the best way to invest in the stock market, and they’re also the easiest. They’re like mutual funds but with more flexibility. You can buy individual stocks, bonds, commodities, currencies and even exchange-traded futures contracts. And you don’t have to worry about picking the right fund — the ETF does that for you.
The most popular type of ETF is called an “index” ETF (also known as a “fund,” “mutual fund,” or “unit trust”). This is a broad market ETF designed to track an index, such as the Dow Jones Industrials, Nasdaq Composite, or Standard & Poor’s 500 (S&P500) on the stock exchange. These types of ETFs are becoming increasingly popular because they offer low cost exposure to broad markets without requiring active management. These ETFs are great if you want exposure to the overall U.S. economy.
Types of ETFs
ETFs are one of the most popular investment vehicles out there because they offer a number of benefits over traditional mutual funds. They allow you to invest in multiple asset classes, including stocks, bonds, commodities, currencies and even cryptocurrencies like Bitcoin. In addition, ETFs provide diversification, making it easier to reduce risks in your portfolio. Finally, ETFs are traded just like individual securities, allowing you to buy and sell shares without having to go through brokers.
Here is a list of different types of ETFs available on the market today.
Passive and active ETFs
An ETF is usually described as being either passively managed (replicating the index) or actively managed (trying to beat the index). A passive ETF aims to replicate the performance of an index, while an active fund attempts to outperform it. While both types of ETFs have advantages and disadvantages, we find that actively managed ETFs have several distinct characteristics that make them appealing to individual investors.
The most obvious advantage of actively managed ETFs is that they allow investors to pick and choose what investments they want to hold in their portfolios. This flexibility allows investors to build a diverse portfolio that matches their risk tolerance, investment objectives and financial goals. Another benefit is that actively managed ETFs can provide exposure to sectors or trends that might otherwise be difficult to access. For example, many large cap growth stock indices exclude small caps due to the difficulty in tracking smaller companies. However, an actively managed ETF could offer exposure to small cap growth stocks without having to track every single one.
Another key difference between passive and actively managed ETFs is management fees and administrative costs. Many actively managed ETFs charge much higher fees than passive ones because they require professional money managers to carry out trades. In addition, some actively managed ETFs pay dividends, which are taxed at ordinary income tax rates, whereas passive ETFs don’t.
Finally, actively managed ETFs can be less liquid than passive ETFs. Because actively managed ETFs must trade frequently and incur transaction costs, they are subject to price slumps or spikes during periods of market volatility. As a result, actively managed ETFs are harder to sell than passive ETFs.
Bond ETFs
Bonds are loans that are secured against assets, usually government debt. When interest rates rise, bond prices fall. This makes bonds great investments during times of economic uncertainty.
Bond ETFs are an investment vehicle similar to mutual funds where you invest money into a basket of bonds. These ETFs are traded like stocks and are subject to market fluctuations just like stocks. There are several types of bond ETFs including fixed income, high yield, emerging markets, muni, etc.
The returns generated from bond ETFs are based on the performance of the underlying bonds it invests in. This is different from traditional investments such as stocks and real estate because there is no guarantee that the return will be positive. If interest rates rise, the value of the bonds decreases. However, the opposite happens if interest rates fall. So, unlike stocks and real estate, bond ETFs don’t generate guaranteed returns.
Unlike traditional investments, bond ETFs usually trade at a premium or a discount relative to the actual bond prices. For example, if the current price of a particular bond is $100, the ETF could trade at $110 or $90. In addition, the yields offered by bond ETFs are typically lower than those of the underlying bonds.
Stock ETFs
These are assets such as companies or real estate that are traded publicly. You can use them to make money by buying low and selling high, or you can hold them for long periods of time.
Stock ETFs are one of the most popular types of ETFs today. These are baskets of stocks designed to give investors broad exposure to a particular market segment. They are similar to stock index mutual funds in that they hold large blocks of shares of companies within a given industry or sector. But unlike mutual funds, they don’t actually own those companies; rather, they trade like regular stocks on exchanges around the world.
In addition to tracking a specific group of stocks, stock ETFs often invest in different types of stocks, such as small-mid and large-cap stocks, or value stocks. This helps reduce risk because it spreads out how much money you’re putting into each investment.
Commodity ETFs
Commodities are raw materials that are bought and sold in global markets. Examples include oil, gold and silver. Many people speculate that commodity prices will increase due to increased demand caused by population growth and rising incomes around the world.
They offer several benefits. For example, they diversify portfolios, making them easier to hedge downturn periods. For instance, commodity ETFs can help protect investors from slumps in the stock market. Secondly, owning shares in an ETF is cheaper than physically possessing the underlying asset, because the latter doesn’t require insurance and storing costs.
Industry/Sector ETFs
These funds invest in companies within a particular industry. For example, an energy ETF will track the performance of companies operating within the energy market. The main benefit of investing in an energy ETF is that it allows investors to get exposure to the upsides of the energy market without having to buy individual stocks.
Leveraged ETFs
There are several types of leveraged funds. One common type is called a “leveraged long/short equity.” Here, the investor buys both a long position (longer term) and short positions (shorter term). As the market moves up, the long side increases in value, while the short side decreases in value. When the market declines, the opposite occurs.
Another type of leveraged product is a “leveraged commodity” fund. In this case, the fund holds commodities like oil, gold, silver, etc. and uses derivative instruments to multiply the returns.
A third type of leveraged product involves holding foreign currencies. An investor could purchase a currency pair fund that holds pairs like USD/JPY, EUR/GBP, AUD/USD, etc. and multiplies the returns.
The final type of leveraged product we’ll discuss here is known as a “leveraged exchange traded fund,” or “leveraged ETF.” A leveraged ETF is similar to a traditional ETF, except that it includes additional derivatives. For example, a 2× SPX ETF might include options, futures and swaps to achieve a 2× multiplier.
Inverse ETFs
An inverse ETF attempts to make money during periods of falling markets by betting on rising prices. To do this, the fund borrows shares of a particular stock, sells them and buys them back later at a lower price. If the stock rises, the fund makes money because it pays less than what it borrowed. But if the stock falls, the fund loses money because it must pay more than what it borrowed.
The concept of inverse investing originated in Japan in the 1990s. A number of funds launched in the United States in 2010.
Currency ETFs
Currencies are the primary form of exchange worldwide. Popular examples include dollars, euros and pounds sterling. Investors can use currency ETFs to gain exposure to foreign economies and countries.
There are many different types of currency ETFs, including commodity-linked funds, emerging market funds, developed market funds and others. These funds allow investors to invest in specific countries, regions, or sectors within a given region, providing a unique way to build portfolios around specific geographic regions, industries or themes.
Advantages and Disadvantages of ETFs
Compared to actively managing their own portfolios, investors pay lower fees when using ETFs because they simply purchase shares of the entire fund. An ETF tracks an index such as the S&P 500 or Dow Jones Industrial Average, meaning the value of the holdings stays relatively stable over time. This makes buying and selling shares easier, since you don’t have to constantly monitor whether the value of the stock changes.
Investors only need to execute one trade to purchase or sell shares of an ETF. There are often fees associated with executing a trade, however, including brokerage charges, bid/ask spread, and exchange fees. These fees add up quickly and can eat away at the returns earned by investing in ETFs.
Brokerage commissions are charged whenever an investor buys or sells shares of an ETF. If the ETF holds many different companies, the commission can be quite high. In addition, some brokerage firms charge extra fees for transactions involving small amounts of money or for certain types of accounts.
The expense ratio is the cost of operating and managing the fund. Many ETFs have very low expense ratios because they invest in broad market indexes like the S&P 500. However, most ETFs still have an expense ratio compared to traditional mutual funds. A smaller percentage of ETFs charge no annual fee.
If You Want to Diversify Your Portfolio, Here Are Ten Best Vanguard ETFs
Vanguard has been around since 1958, but its ETF offerings didn’t start until 2004. Since then, the company has become one of the largest providers of ETFs in the world. Today, Vanguard offers nearly 1,000 ETFs that cover everything from commodities to real estate investment trusts (REITs).
Here are ten best Vanguard ETFs:
1. iShares Core MSCI ACWI ex US – $1,832.50
This ETF provides exposure to international stocks. The fund invests primarily in U.S. based companies that operate outside the country. It also includes companies based in Canada, Europe, Australia, Asia and Latin America.
2. Vanguard FTSE All World ex UK – $2,099.00
This ETF provides exposure to global equities. The fund invests in large, mid and small capitalization companies located throughout the globe.
3. Vanguard Total Stock Market Index Fund – $2,948.00
This ETF provides exposure across the entire U.S. stock market. It’s designed to track the performance of the S&P 500, which represents about half of the U.S. economy.
4. Vanguard Emerging Markets Bond Fund – $2,766.00
This bond ETF provides exposure to emerging markets debt instruments. It seeks to replicate the return of the Barclays Capital EMBI Global Corporate Bond Index, which consists mainly of corporate bonds issued by companies in developing economies.
5. Vanguard REIT Index Fund – $2.639.00
This ETF provides exposure to real estate investment trust (REIT) stocks. The fund invests in publicly traded companies that own income-producing properties.
6. Vanguard Short Duration Bond Fund – $2.834.00
This bond fund provides exposure to short-term debt instruments. It aims to mirror the performance of the Lehman Brothers Aggregate Bond Index, which consists mostly of government and corporate bonds.
7. Vanguard International Equity Fund – $2,879.00
This fund provides exposure to foreign equity securities. It invests in developed countries such as Japan, Germany, France, Italy and the United Kingdom.
8. Vanguard Developed Markets Bond Fund – $3,093.00
This bond fund provides exposure to long-term debt instruments issued by companies in developed nations. It tracks the Barclays Capital Long Term Government/Corporate Bond Index, which consists of both government and corporate bonds. The index covers countries including the United States, Canada, Western Europe, Japan, South Korea, Australia, New Zealand, Mexico, Brazil, Argentina, Chile, Peru, Colombia, Venezuela, Turkey, India, Indonesia, Malaysia, Singapore, Philippines, Thailand, Hong Kong, China, Taiwan and South Africa.
9. Vanguard Emerging Markets Bond & Money Market Fund – $3,072.00
This fund combines two different types of investments into one package. It provides exposure to emerging markets bonds, while also offering money market funds.
10. Vanguard Total International Bond Fund – $3.082.00
This bond and money market fund provides exposure to fixed income assets from around the world. It is designed to track the Barclays Capital International Bond Index, which consists primarily of corporate and government bonds from developed and emerging markets.
How Many ETFs Should You Own? Key Takeaways
ETFs are one of the hottest investment tools today. As a way to provide exposure to multiple assets, ETFs allow investors to gain access to different sectors of the market without having to purchase individual stocks. However, there are trade-offs associated with investing in ETFs.
The main drawback is that ETFs are often expensive compared to traditional investments like mutual funds. In addition, holding too many ETFs in a portfolio can introduce inefficiencies into the overall risk reward profile of the portfolio. This is because each ETF is designed to track a specific index, such as the S&P 500 Index. By owning a large number of ETFs that attempt to replicate the same index, you run the risk of introducing tracking error into your portfolio. Tracking error occurs when the performance of one fund does not match up to the benchmark index.
In general, an investor should limit his or her holdings to five to ten ETFs per asset class, geography and other characteristics. With this approach, an investor can achieve a certain degree of diversified exposure, while still maintaining simplicity in managing the portfolio.
