Exchange-traded fund (ETF) is a type of investment option, similar to mutual funds, except that ETFs can be traded on stock exchanges whereas mutual funds are bought and sold directly from the issuer.
ETFs are one of the best investment options for people with low budgets, for people who are not ready to take higher market risks, and for people who are not much active in the financial arena.
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iShares, one of the popular collections of exchange traded funds, is owned by BlackRock, the world's largest asset management company.
iShares, one of the popular collections of exchange traded funds, is owned by BlackRock, the world's largest asset management company.
Types
Index ETFs
Most ETFs are index based which try to replicate the performance of a specific index. These indexes may be based on the values of stocks, bonds, commodities, or currencies. Index based ETFs seek to hold the portfolio of highly performing stocks, thereby maximising the profits in a maximum way.
Bond ETFs
ETFs, like any other finance instrument, have some risk attached with it. However, Bond ETFs are less riskier than most of the other categories, as they try to invest in safe and stable bonds. Government bonds are chosen as safe zones with stable income, while other private bonds are preferred for more-than-normal income for the not-so-high risk involved.
Commodity ETFs
Commodity ETFs exclusively invest in highly demanded commodities such as precious metals, agricultural products, crude oil. In unregulated countries digital assets like NFTs and Crypto are being prospects for ETF investments. They are similar to index ETFs, the only difference being that Commodity ETFs only invest in commodities unlike index ETFs.
Currency ETFs
Currency ETFs exclusively invest in specific currency or a basket of selected currencies, as per their profitability analysis. They profit from the foreign exchange difference. These types of ETFs use hedging tools to avoid any distortions, and employ other means to earn more yield.
Inverse ETFs
Inverse ETFs are just the opposite of index ETFs. While index ETFs profit from the rise in the value of underlying benchmark or index, Inverse ETFs try to profit from decline in the value of the underlying benchmark or index with the help of various hedging tools.
Leveraged ETFs
Leveraged ETFs are high risk ETFs, with an ultimate goal to get double, triple, or multiples of normal profits that an index ETF can earn. They use various financial engineering techniques extensively to achieve this goal. While this sounds good for taking huge risks, one should think of losses which would be in multiples too.
Thematic ETFs
Thematic ETFs have a specific theme for their investment portfolio. Primarily they follow the social trends and public talk and move within that diameter. Recent developments in e-commerce, artificial intelligence, electric vehicles have driven them into these.