Exchange-traded fund (ETF) is a type of fund that represents a collection of underlying assets, including stocks, bonds, commodities, or a mix of investment instruments. This makes ETF investing a great way to diversify a portfolio.
Uncover various aspects of ETF investing in this article.
While many want to gain exposure in the stock market to earn high returns, a lot of them find it difficult to select the right assets. Many people don’t know how to fundamentally and technically analyse stocks to choose the right ones. Comparatively, investing in exchange traded funds (ETFs) that have stood the test of time helps an investor diversify his portfolio.
ETF funds are a basket of securities that allow investors to invest in stocks and other asset classes. In case of exchange-traded funds, the money received from investors is used to invest in securities based on the objective of the ETF.
When an investor purchases a Nasdaq 100 ETF, then he/she gains exposure to the index’s 100 companies. Furthermore, ETFs trade like stocks on the exchange. Hence, ETF trading can be done when the market is open.
However, an investor is often confused as there are various ETFs and there are different ETF trading strategies. Thus, it can be a difficult task to select and buy ETF. ETFs are mainly categorized as:
- Market-Cap Index ETFs
Market-Cap Index ETFs invest in the stocks listed in the index chosen by the investor. For example, if an investor invests in an S&P 500 ETF, then he/she gains exposure to the 500 companies listed in that index.
- International ETFs
International ETFs provide exposure in global companies based in different geographic locations, such as Asia, emerging markets, etc.
- Dividend ETFs
Investors looking to invest in companies that offer dividends can consider dividend ETFs. Generally, such ETFs are stable and provide good returns to the investors.
- Sectoral ETFs
Sectoral ETFs help investors to choose a specific sector and invest in companies in that sector. For instance, a healthcare ETF will give an investor exposure to companies in the healthcare sector.
- Commodity ETFs
Commodity ETFs have major holdings in various commodities, such as metals, oil, etc. Commodity ETFs can help the investor gain exposure in the commodities space via future contracts or directly. Although, commodity ETFs can allow people to diversify their portfolio, investors must keep in mind that commodity prices tend to fluctuate in uncertain times.
- Currency ETFs
A currency ETF provides investors with exposure to changes in foreign exchange (forex) rates across one or more currency pairs. Currency ETFs underlying currencies are held in a single country or basket of currencies like any investment, currency ETFs come with their own risks and rewards.
- Long-Term Bond ETFs
Long-Term Bond ETFs helps you to invest in bonds with longer maturity. However, it must be noted that long-term bond ETFs are exposed to fluctuations in interest rates.
- Short-Term Bond ETFs
Short-term bond ETFs help an investor gain exposure in bonds that have a short maturity period. Generally, the maturity period is a few years. These ETFs are less risky as they don’t fluctuate a lot due to changes in interest rates.
Why Choose ETFs
ETFs are a great way to diversify your portfolio amid volatile times. Making room exchange traded funds for can help you grow your corpus if you choose the right ETF for your investment objective.