Types of ETFs – Benzinga

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Benzinga explains the different types of ETFs available to investors.

The universe of exchange-traded funds (ETFs) is growing day by day, with more than 8,500 ETFs worldwide holding more than $10 trillion in assets under management (AUM) by 2022.

Choosing the right type of ETF can be difficult given the myriad of choices available. Because ETFs can hold a variety of assets, employ a range of strategies, and use different fund structures, it can be easy for new ETF investors to become overwhelmed with the choices available.

If you’re looking to start an ETF portfolio, this guide to understanding the types of ETFs available can be helpful. Knowing the difference between ETFs can help investors select the best options for their portfolios.

What are the different types of ETFs?

Most ETFs can be categorized by their assets, geography, and strategy. It is important to note that these categories are not mutually exclusive. In fact, they are often combined with each other to produce new types of ETFs. Here are some examples:

Asset holding

ETFs can be classified according to their underlying assets. For example, an equity ETF is a type of ETF that holds stocks, while a fixed income ETF is a type of ETF that holds bonds. Commodity ETFs can include precious metals, energy, or agriculture futures. Other assets include currencies and even derivatives.

Geography

ETFs can also be classified based on the geographic location of their underlying assets. For example, an ETF for US markets tracks US equities, while an ETF for emerging market bonds tracks bonds from countries such as China and Russia. These ETFs can be country-specific or target one of three major geographic market distinctions: US, Developed International, and Emerging International.

Strategy

An ETF strategy refers to the rules by which it selects and manages holdings. The most common example is the passive ETF, which attempts to track and replicate the performance of an index. Other types include active ETFs that try to outperform a benchmark or focus on a specific goal, such as monthly income or hedging. Then there are “smart beta” or “factor” ETFs that use automated quantitative frameworks to provide exposure to a specific factor, such as size, value, quality, momentum, or low volatility. Finally, some ETFs explore environmental, social and governance (ESG) considerations.

ETFs can mix and match these types to create a unique strategy. Take the example of an actively managed US equity ETF that focuses on small cap stocks. For this ETF, the asset is the stock, the geography is the US, and the strategy is smart beta/factor.

Where to buy and sell ETFs

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Why invest in ETFs?

ETFs are not the only option for investors today. Mutual funds and individual stocks or bonds may be possible alternatives. Still, there are some compelling reasons to make ETFs the core of your portfolio. These include:

Simplicity: Some ETFs offer a one-stop shop for your portfolio needs. For example, investors can easily buy broad market ETFs that contain thousands of stocks on a single symbol. Managing a few ETFs is also much easier than manually tracking and rebalancing multiple individual positions.

Reduced costs: Unless you’re dealing with a commission-free brokerage firm, trading dozens of individual stocks can cost you dearly in brokerage fees and bid-ask spreads. ETFs allow investors to minimize the transactions required to keep their portfolios up to date. In particular, some passive index ETFs can have expense ratios as low as 0.03%.

Accessibility: ETFs provide exposure to a variety of strategies and assets that retail investors may find difficult to implement on their own. For example, buying a covered call ETF saves investors the hassle of manually trading options. Buying a commodity ETF saves investors the hassle of manually trading futures contracts.

Can you diversify with ETFs?

Investing in ETFs is one of the best ways to instantly diversify your portfolio at a lower cost. However, there are some tips and tricks you can apply to ensure that your ETF portfolio becomes as diverse as possible.

Select ETFs that cover multiple assets: Good diversification means spreading the risk of your portfolio across different assets, such as stocks, bonds, cash and commodities. A good way to do this is to select ETFs that track each of these asset classes and keep them in ratios that reflect your risk tolerance and time horizon. For example, a young long-term investor might hold most of their portfolio in an equity ETF and a smaller portion in a bond ETF.

Select ETFs that span multiple regions: Betting on a single country’s stock market, regardless of its historical performance, is sub-optimal. While US stock and bond markets have outperformed over the past decade, there is no guarantee they will continue to do so in the future. There have also been periods of prolonged stagnation, such as during the “lost decade” for US equities from 2000 to 2010. Therefore, ETF investors should aim to hold equity and bond ETFs that also cover international geographies.

Avoid overlapping ETF positions: It is important to research an ETF’s underlying holdings to ensure that the ETFs in your portfolio do not have excess holdings. For example, an investor who owns both an S&P 500 ETF and a Nasdaq 100 ETF has significant overlap when it comes to mega-cap tech stocks. This overweight position bodes badly for diversification.

Compare ETF brokers

Investors looking for additional information and ETF ratings can use Benzinga to compare available options. Here is a list of brokers that support ETF trading and provide research tools to help investors select the right type of ETF.

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    Long term investors

  • Best for

    Intermediaries and investors

  • Best for

    Active and global traders

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    Get up to $2,500 bonus money

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    Refer friends and get FREE stock

What are the best ETFs to buy?

There are two ways to answer this question. From an individual investor’s perspective, the best ETF to buy depends on your investment goals, time horizon, and risk tolerance. From a general market perspective, the best ETFs to buy are a combination of high assets under management and daily trading volumes. These ETFs would SPDR S&P 500 ETF trust (NYSEARCA: SPY), the iShares Core S&P 500 ETF (NYSEARCA: IVV) and the Vanguard S&P 500 ETF (NYSEARCA: VOO), all of which track the S&P 500 index. These ETFs are very popular due to the importance of the S&P 500 as a benchmark and barometer of the overall performance of the US stock market.

Which type of ETF is best?

There is no definitive answer to the question of which type of ETF is best. It all depends on each investor’s investment objectives, time horizon and risk tolerance. Once these are determined, an investor can select the best type of ETF by researching the right asset classes, geography, and strategy. For example, a retiree looking for constant monthly income may prefer an ETF that focuses on low-volatility U.S. stocks such as Invesco S&P 500 High Dividend Low Volatility ETF (NYSEARCA: SPHD). A young investor looking for aggressive growth may prefer a tech-heavy index ETF like the Invesco NASDAQ 100 ETF (NASDAQ:QQQM). Investors should be careful not to select ETFs based on historical performance, as they have no predictive value for future performance.

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