What is an ETF (Exchange-Traded Fund)?

An Exchange-Traded Fund (ETF) is an investment entity that trades on stock exchanges, similar to that of a stock. ETFs hold stocks, bonds, commodities, and derivatives like futures, and they trade very close to the net asset value of what they own. These funds give investors a way to invest in a sector, commodity, currency, or stock index, without the volatility of individual stocks.

Types of ETFs

Index ETFs The top ETFs by volume track the value of large indexes like the S&P 500 or the Nasdaq 100. The largest ETF is SPY, commonly called the Spider, which tracks the S&P 500. This index is widely regarded as the standard for measuring the performance of large-capitalisation U.S. stocks. Another popular fund is QQQ, which tracks the Nasdaq 100 index. This fund can be considered a proxy for technology stocks, which are heavily represented in the Nasdaq market. Commodity ETFs There are specific ETFs that track the futures of oil, gas and copper, and a couple of funds that track a basket of grains. Investment in commodity ETFs can be dangerous because the future contracts that they invest in carry an implied storage cost and tend to decay over time. Sector Exchange Traded Funds Vanguard ETFs, a large family of funds, are available in most sectors. VIS tracks a number of stocks in the industrial sector, and VCR tracks stocks in the consumer discretionary sector. Currency ETFs An ETF exists for almost every currency. Furthermore, there are funds on both the bearish and bullish sides. In other words, you can bet that the currency, say the dollar, will rise or fall. Leveraged ETFs Some ETFs are designed to produce double or triple the moves of the underlying assets. Caution: these funds can make you double or triple profits when they rise, but in the same way, losses will also be double or triple when they fall.

Buying and selling ETFs

ETF trading takes place on all trading exchanges. The funds can be bought and sold through any broker, including online brokers, which can provide ETF information and Exchange Traded Funds lists. Making profits in ETFs Profits are made with ETFs, as with any investment, when the asset increases in value. The transaction cost of buying and selling ETFs is the same as selling any stock, and should be factored in to profit and loss. In addition, the fund withdraws a management expense, which in most cases amounts to around 1% of total assets per year.