What are Exchange Traded Funds?

Conventional ETFs:

Conventional ETFs aim to replicate the performance of a specific index by investing in the index’s underlying securities such as stocks, bonds, among others. Such ETFs physically hold the underlying securities of the index they track.

Synthetic ETFs:

Synthetic ETFs also aim to replicate the performance of a benchmark index. However, instead of tracking the underlying securities of the index these ETFs track the index using derivatives such as swaps. Synthetic ETFs do own any physical securities, and the way these ETFs operate is also different from Conventional ETFs. In Synthetic ETFs, the ETF fund manager enters into a swap agreement with a counterparty, which in most cases is an investment bank. In the swap agreement, the counterparty typically agrees to pay the benchmark return to the ETF.

Bond ETFs:

Bond ETFs, as the name suggests, are ETFs that are invested in bonds. These ETFs hold bonds that have different strategies (low interest bonds to bonds that generate high yields) and different holding period. Investors can invest in government bonds, corporate bonds and municipal bonds (bonds issued by local governments). Bond ETFs are typically traded at a discounted price rather than their original price.

Stock ETFs:

Stock ETFs are ETFs that consist of a basket of stocks. Stock ETFs do not contain stocks of a single company. Instead, they typically track stocks of a single industry or the entire index of equities. One of the main aims of stock ETFs is to give exposure to only one sector rather than multiple sectors. Such sectors usually include high performing companies or the new ones that look promising.

Commodity ETFs:

Commodity ETFs are ETFs that invest in physical commodities such as oil or gold. Commodity ETFs can offer several benefits, for instance, they can diversify a portfolio and impede a downturn. Also, it can be cheaper to hold shares in commodity ETFs than to keep them physically as the latter may require one to pay extra for storage and insurance.

Currency ETFs:

Currency ETFs are ETFs that track the performance of domestic and foreign currencies. These pooled investment vehicles can speculate the price of currencies as per the economic as well as political developments in the country. Investors can also use currency ETFs to diversify their investment portfolios. They can also be used as a hedge against forex market fluctuations and inflation threats.

Inverse ETFs:

Inverse ETFs are ETFs that aim to generate profit by shorting stocks. Shorting is a process wherein the investor sells a stock without owning it and expects its value to decline so he/she can purchase it at a lower price. To short a stock, inverse ETFs make use of derivatives. Whenever there is a dip in the market performance, the ETFs increase by a proportionate price. It should also be noted that several inverse ETFs may be ETNs (Exchange Traded Notes) that are traded like stocks but are backed by a bank or other similar issuer. You may want to check with your broker or do your research to find out whether an ETN will be an ideal fit for your portfolio.

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