What is an ETF? Different Types of Exchange Traded Funds and How They Work

February 22, 2021 - Петр Мазайло

What are ETF stocks? ETF stands for ‘Exchange-Traded Funds’, and they are basically a package of different shares grouped together into a fund, which, in turn, is characteristically almost like a stock (except for several small distinctions).

ETFs are considered to be amongst the top assets available on the wide stock market next to shares, currencies, and commodities. There are billions of dollars exchanged over these funds annually.

Despite this, it’s not correct to compare ETF assets to standalone currencies or shares because an ETF can include many different types of assets. They are mostly comprised of similar products and grouped into types based on their components.

What types of ETF assets are there?

High-profile ETFs are mostly made of assets with a similar nature, be that a number of similar asset types or numerous assets for the same branch of the economy. There are several main categories of such ETFs:

  • Commodity ETFs: these combine valuable materials, like various metals or energy resources of different producers.
  • Currency ETFs: these combine similar currencies into a package.
  • Bond ETFs: these combine bonds issued by the government or other institutions.
  • Industry ETFs: these combine all sorts of assets related to a specific industry or economic area.

There are certainly more types of funds, but these are the most publicly acclaimed and widespread. The ETFs can be made up on all kinds of grounds, but the reasons are always justified.

For instance, if you’d want to invest into, say, oil-refining, there would be tons of funds that were built specifically for this goal by the oil-refining companies. These could include company shares, oil commodities, or even related currencies.

Evidently, ETFs are fairly complex and clearly not for amateurs or beginners. Still, traders of different caliber use the help of financial specialists and even some firms to navigate in the world of ETF.

How to trade ETFs?

The process of trading these assets is pretty simple in itself. All you need to do is get yourself an account with an online brokerage provider, choose an ETF you like (see what the available funds consist of) and place an order.

You’ll most likely have to select the quantity as well, so you should really check how many different assets are in any one specific ETF. You can’t alter the components, although you can pick alternative ETFs if there are several options.

The most vital moment is to pick the ETFs that won’t fail you because these are seldom short-term investments. They are just too complex to invest short-term. That’s exactly why some renowned financial specialists choose to help unprofessional investors manage their ETFs correctly through signal trading.

S&P 500 ETF

S&P 500 ETF is one of the most popular investment assets in the world precisely because it’s easy to predict the coming changes that may happen to the prices of this ETF.

S&P is actually a popular index that shows exactly how well the top 500 American companies are doing at the moment of looking at the index. S&P ETF is a reflection of this index, and it consists of the same assets featured in the mentioned index.

Many knowledgeable trading specialists use this index in order to predict the upcoming value change of the assets featured therein. They build complex algorithms to deduce the market situation in the near future. NinjaTrader, for instance, is a trading robot that automates the trading process based on this knowledge.

So, if you are new to trading and consider investing in ETFs, you may want to buy an S&P ETF and monitor it with an automated algorithm that uses this index to predict the changes coming in the nearest future.

Alternatively, you can use the help of the signal traders, which is the same thing, but the advice will instead come from a real person.

It’s actually more thoughtful to do this instead because ETFs are usually meant for long-term investments, and you’ll have to turn your bot on during unstable circumstances and look out for signals.

The real signal traders, on their part, use more sophisticated analysis methods. They are easy to find and usually just text all of their clients whenever there’s a crisis or price surge coming. For a modest commission, that is.

Why bother with ETFs?

The funds are complicated. They require some preparation and knowledge about the market. But why even bother investing in them? What is ETF meaning?

Well, ETFs are better than typical stocks in several ways. Here are several good reasons why joining the ETF trading club may be a good idea:

  • Decreased Risk. One of the main ways to decrease the risk of your investments is to diversify the portfolio. Several different assets are less likely to drop in price simultaneously than just that one share you invested into. By buying ETFs, you automatically acquire a diverse portfolio.
  • Price. Exchange-traded funds are often much cheaper than some other kinds of grouped assets, like mutual funds or sometimes even shares (especially in long term).
  • Effectiveness. ETFs can be bought just like regular stocks at any moment. Given their prior advantages, you can see how beneficial it would be to get yourself an ETF rather than a simple stack of identical shares.
  • Choice. Just like stocks and other assets, you can find an ETF option that suits you specifically from the myriad of other possible candidates.

Still, this sort of investment is pretty complicated by nature. You will want to do some prior research on the shares included in a package or at least about the area of the economy where the issuer companies are located.

The majority of professional ETF investors (those who don’t just invest in the S&P 500 and other big names) get certain ETFs because they know the economy that represents the ETF. Beginners, therefore, are advised to steer clear of anything other than entry-level ETFs, and only if they have some third-party help.

What steps should I take to invest?

To condense all the advice and information given in this article, let’s form a few steps that you may take to invest into your first ETF (or ETFs).

  1. Understand what types of ETFs there are. In this article, you’ve been given an overview and only about the components. There are more types, and even those you know about should be studied thoroughly and properly, including what rules the investors usually adhere to working with them, what assortments of funds there are, and how liquid these funds can be.
  2. Know the value of having a portfolio in the particular area you’re after. If it’s better, more comfortable, efficient, and affordable to build your portfolio using individual stocks, then it’s better to do so.
  3. Search the market for potential ETFs. If you decided that getting an ETF is worth it, then you should also scan the market for products that may match your goals.

Do some homework, and you’ll be alright.

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