Since the financial crash in 2008, exchange-traded funds (ETFs) have grown from $530 billion to $4 trillion in investments. Americans love ETFs and this is just the beginning of this upward trend.
If you haven’t jumped on the ETF bandwagon yet, then it’s time for you to learn the exchange-traded funds’ definition and start investing in more than just stocks. Keep reading to find out more about what are exchange-traded funds.
What Are Exchange-Traded Funds at Their Essence?
You are probably aware of the most popular ETF out there, the SPDR S&P 500 ETF (SPY) which tracks the S&P 500 Index. At its core, ETFs are a type of security that tracks an index, sector, or commodity. The brilliant thing about ETFs is that they can be traded on the stock market just like stocks can.
An ETF can contain a wide variety of instruments like stocks, bonds, commodities, or a mixture of all these. That’s why ETFs are so loved because they are so versatile and they are an easy way of getting into certain commodities or markets which otherwise wouldn’t be accessible to the traditional investor.
For example, maybe you are interested in investing in the international stock market, but you don’t want to bother with going to each stock exchange and investing directly into it. Well, you could invest in JPMorgan’s International Growth ETF (JIG) instead, which contains a basket of 50-70 foreign stocks, with a 15% weighting towards China. Easy, right?
If you wish to learn more about how to diversity with ETFs, check out www.monexsecurities.com.au/.
What Kind of Exchange Traded Funds Exist In the Stock Market?
There is a wide variety of ETFs that exist on the stock market, and allow you to invest in them for income generation, speculation or to hedge or offset risk in your portfolio.
Bond ETFs
These are used to provide a regular income to investors and their income distribution depends on the collection of underlying bonds that the ETF invests into. These could include government bonds, state bonds, and corporate bonds.
Stock ETFs
These comprise a basket of stocks that track a particular industry or sector. It could be foreign stocks (like mentioned above) or an automotive ETF.
Commodity ETFs
Crude oil, gold, silver, and other commodities – you can invest in them easily using a commodity ETF. You can also use these hedge downturns in the economy, helping you diversify your portfolio.
Currency ETFs
These usually track the performance of currency pairs, usually domestic and foreign currency. Again, you can use these ETFs to diversify your portfolio and protect your investments from economic downturns.
Use the Exchange-Traded Funds’ Definition to Your Advantage
Now that you are a semi-expert of the exchange-traded funds’ definition, you can start using ETFs in all their glories to your portfolio’s advantage. It’s all about mixing and matching them to fit your specific investment goals.
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