ETF Investing - Different Types of ETFs

ETF investing offers you are a perfect investing mix, because you can choose among different types of ETFs, like index, country, sector, currency, commodity, short, leverage...

Within ETF investing you can choose among different types of ETFs. Most ETFs track the performance of a broad index, such as the Dow Jones Index, or it may track a specific country, sector, industry, commodity, or currency. In 2008 the U.S. Securities and Exchange Commission began to authorize the creation of actively managed ETFs. Besides, ETFs can be size-specific, leveraged or short.

Different Types of ETFs

U.S. Index ETF

An index ETF is considered the most common type of ETF investing, and tracks indices associated with certain stocks or bonds. An example of an index ETF would be PowerShares QQQ (ticker: QQQQ), which tracks the NASDAQ 100 index. Index ETFs are not actively managed, but represent a predetermined index of stocks or bonds.

Country-Specific (Foreign Market) ETF

The U.S. is not the only country to have market index ETFs. There are many foreign ETFs to choose from as well. If you're an investor looking for international exposure or to hedge foreign investing risk, country or region ETFs may be an option for you. A country-specific ETF tracks the performance of the economies of an individual country, like Germany, China or Brazil. An example of country ETF investing is Market Vectors Russia ETF (ticker: RSX), which tracks DAXglobal Russia Index. Some ETFs track a specific region such as Europe for example.

Sector & Industry ETF

A sector ETFs holding represents a segment of an economic market. Common sectors include Basic Materials, Consumer Goods, Financial, Government, Health Care, Industrial Goods, Services, Technology, and Utilities. An industry ETF represents a particular industry (more specific then broader sector), such as "Life & Health Insurance" within "Finance" sector, and provides investors the ability to track the collective performance of that industry. You can read more about different sector classifications in the Stock Market Content website.

Bond ETF

A bond ETF exclusively invests in bonds. Bond ETFs are very much like bond mutual funds in that they hold a portfolio of bonds and can differ widely in strategies, ranging from U.S. Treasuries to high yields, from long-term to short-term. Bond ETFs have a difficult task when it comes to construction since they track a low-liquidity investment product. Bonds are not active on secondary markets since they are normally held to maturity. Bond ETFs trade like stocks and are passively managed.

Currency ETF

A currency ETF provides investors the ability to track the performance of various currencies throughout the world, such as the U.S. dollar, Japanese yen or British pound, without having to complete complex transactions. Currency ETFs are seemingly simple investment vehicles that track a foreign currency, similar to how a market ETF tracks its underlying index. In some cases this type of ETF investing tracks a basket of currencies, allowing an investor access to more than one foreign currency.

Commodity ETF

Commodity ETFs attempt to track the price of a single commodity, such as gold or oil, or a basket of commodities by holding the actual commodity in storage, or by purchasing futures contracts. Because futures provide leverage, ETFs that use futures contracts have uninvested cash, which they usually park in interest-bearing government bonds. The interest on the bonds is used to cover the expenses of the ETF and to pay dividends to the holders.

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Derivative ETF

There are some types of ETFs that do not consist of equities. Very common with commodity ETFs, some funds are made up of derivative contracts like futures, forwards, and options. While the goal is to emulate an investment product, there are different ways to do so within the construction of ETFs. Assets in the fund can either be individual companies or in these cases derivative products.

Size-Specific (Style) ETF

A size-specific ETF investing is defined by the market capitalization of the individual holdings within the fund. For example, the ETF may characterize its holdings as large-cap, mid-cap, small-cap, or even micro-cap to indicate the relative size of the companies that are held within the ETF. So, if you have a certain investment goal based on a market-cap style, you may be able to reach your target with a style ETF like the SPDR Dow Jones Large Cap Value ETF (ticker: ELV) which tracks the Dow Jones U.S. Large Cap Value Index.

Leveraged ETF

A leveraged ETF is designed to magnify the performance of an underlying index. This type of ETF investing provides investors with the prospect of amplifying their returns when the market responds in an expected direction. As a caution, if the market takes an unexpected turn, the investor will also magnify losses instead of gains.

Short (Bear Market Or Inverse) ETF

A short or bear market ETF is designed to return the inverse or opposite of an underlying index. The short ETF provides investors with an opportunity to benefit from declines in the underlying index. This is becoming a popular way for many investors to hedge their portfolio for downside risk in the markets.

Actively-Managed ETF

First there were mutual funds, with their active management and high fees. Then ETFs came, which keep their costs low by passively tracking an index. In 2008 first actively-managed exchange-traded funds started operating. They're supposed to offer investors the best of both worlds - professional management and low costs. An example of actively-managed ETF investing is AdvisorShares Dent Tactical ETF (ticker: DENT).

Largest 30 ETFs by 3-Months Average Trading Volume

The following table lists the top 30 largest exchange-traded funds, ranked by 3-months average trading volume as of 06/07/2010.

Fund Name Ticker Category Fund Family Volume
SPDR S&P 500 SPY US Index SPDRs 244.353.000
Financial Select Sector SPDR XLF Sector-Industry State Street Global Advisors 122.803.000
PowerShares QQQ QQQQ US Index PowerShares 99.555.000
iShares MSCI Emerging Markets Index EEM Country-Specific iShares 87.000.600
Direxion Daily Financial Bear 3X Shares FAZ Leveraged Direxion Funds 79.722.600
Direxion Daily Financial Bull 3X Shares FAS Leveraged Direxion Funds 78.878.000
iShares Russell 2000 Index IWM US Index iShares 77.446.700
ProShares UltraShort S&P500 SDS Leveraged, Short ProShares 45.852.300
Direxion Daily Small Cap Bear 3X Shares TZA Leveraged, Short Direxion Funds 37.456.200
iShares FTSE/Xinhua China 25 Index FXI Country-Specific iShares 32.357.200
United States Natural Gas UNG Commodities ALPS Distributors 29.116.200
iShares MSCI EAFE Index EFA Country-Specific iShares 26.291.400
iShares MSCI Japan Index EWJ Country-Specific iShares 25.301.700
Energy Select Sector SPDR XLE Sector-Industry State Street Global Advisors 23.802.500
iShares MSCI Brazil Index EWZ Country-Specific iShares 23.495.100
ProShares Ultra S&P500 SSO Leveraged ProShares 21.993.700
iPath S&P 500 VIX Short-Term Futures ETN VXX Volatility iPath 20.762.800
ProShares UltraShort QQQ QID Short ProShares 19.895.700
Industrial Select Sector SPDR XLI Sector-Industry State Street Global Advisors 18.342.400
SPDR S&P Retail XRT Sector-Industry State Street Global Advisors 17.221.600
iShares Dow Jones US Real Estate IYR Real Estates iShares 17.156.700
SPDR Gold Shares GLD Commodities State Street Global Advisors 17.065.400
Semiconductor HOLDRs SMH Sector-Industry Merrill Lynch 16.778.400
Vanguard Emerging Markets Stock ETF VWO Diversified Emerging Markets Vanguard 16.710.900
ProShares UltraShort Financials SKF Leveraged, Short ProShares 15.978.400
iShares MSCI Taiwan Index EWT Country-Specific iShares 14.741.400
Materials Select Sector SPDR XLB Sector-Industry State Street Global Advisors 13.527.700
United States Oil USO Commodities ALPS Distributors 13.144.200
SPDR Dow Jones Industrial Average DIA US Index SPDRs 12.963.500
Market Vectors Gold Miners ETF GDX Sector-Industry Van Eck 12.869.000

Source: Yahoo Finance

Difference Between ETF and ETN

ETNs - Exchange Traded Notes are not truly a type of ETF, even if people and some financial portals still lump them into the major ETF categories. ETNs are issued by a major bank as senior debt notes. When you buy an ETN, you receive a debt investment similar to a bond. ETNs are backed by high credit rating banks so they are considered secure investment products, however the notes are not totally absent of credit risk.

Just like ETNs, also ETCs exist. ETC is abbreviation for Exchange Traded Commodities and have the same characteristics like ETNs.

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