Exchange traded funds, or ETFs, are a collection of securities that track an underlying index, such as the SPDR S&P 500 ETF, which tracks the S&P 500 Index. ETFs can contain a variety of investments, including commodities, stocks, bonds or a mixture of investment types.
Many investors like to use ETFs to diversify their portfolios, and there are quite a few different types to choose from, including:
1. Market Index ETFs
Market ETFs track major market indexes, and these are some of the most active ETFs. There are also market ETFs that track low-volume indexes.
Investors will find both U.S. and foreign market index ETFs, such as:
- EWG, which tracks the MSCI Germany Index.
- EWJ, which tracks Japan’s Nikkei Index.
- QQQQ, which tracks the Nasdaq-100 index.
- SPDR S&P 500 ETF, which tracks the S&P 500 Index.
2. Commodity ETFs
Commodity ETFs track the price changes of particular commodities, such as oil or gold. Historically, commodities have had little price correlation with equities, and many investors include them in their portfolio in some fashion for diversification.
In addition to hedging risk, commodity ETFs can also give you exposure to physical goods, such as energy resources, precious metals and agriculture products.
However, when making your investment, you’re not actually purchasing the commodity. These ETFs consist of derivative contracts that emulate the price of the underlying commodity.
3. Bond ETFs
Several different types of bond ETFs are available to investors, from corporate to international and government. Bonds reduce a portfolio’s volatility while providing a stream of income.
Bond ETFs pay out interest through a monthly dividend and capital gains are paid out annually.
4. ETNs – Not a True ETF
Exchange traded notes, also known as ETNS, are not true ETFs, but they tend to get lumped into the category.
ETNs are issued by banks as senior debt notes, or senior loans. When you purchase one, you will receive a debt investment that’s similar to a bond. ETNs are considered secure investments because they are backed by high-credit rating banks.
5. Real Estate ETFs
Real estate is another way to diversify an investment portfolio, but not all investors want to deal with the risk and responsibility of purchasing and managing properties.
A real estate investment trust (REIT) ETF is a compromise. It provides investors with exposure to real estate without having to own and manage property.
One of the most attractive aspects of investing in REIT ETFs is that they must pay 90% of their taxable income to shareholders. Volatility is higher compared to bonds, but the yield is also higher.
ETFs can diversify a portfolio, and investors have a range of options when choosing their investments.
Disclosure: The author has no stake in the listed equities.
