What Is an ETF?
The term ETF stands for exchange-traded fund. ETFs are investment funds that are publicly traded on stock exchanges. ETFs can contain any number of assets, including stocks, bonds, and commodities. Nearly every ETF is designed to track the movement of an index like the S&P 500. Due to their low costs and low taxes, ETFs are extremely popular as investments.
Another reason ETFs are popular is because they combine the diversification of a mutual fund with the tradability and liquidity of stocks. This allows owners to treat ETFs with the same short term strategies they would use for normal stocks, like using hedges or options to reduce risk. In comparison to mutual funds, ETFs usually set off fewer capital gains costs, because they turn over less quickly.
There are a few major types of ETFs.
An Index ETF is a group of investments that tries to recreate the performance of a market index. Riskier Index ETFs use derivatives and leverages to create multipliers of market volatility, allowing for much higher potential gains and losses as they track performance.
Commodity ETFs track the performance of commodities like oil and metals. These tend to track group of related or similar commodities and imply less risk than individual items.
Currency ETFs follow the performance of currency exchanges, while Bond ETFs do the same with bonds. Actively managed ETFs are a newer instrument in the American market, as they change their holdings daily and offer full transparency in their transactions and portfolio; however, they have underperformed since being introduced.