Equity & ETFs

Equity & ETFs

Typical equities may include common stock, preferred stock, foreign equities and closed-end funds. An ETF, or Exchange Traded Fund, is a collection of securities such as equities, bonds, and options that is bought and sold like a stock in real time on a stock exchange.

An exchange-traded fund is a type of investment fund and exchange-traded product, i.e. they are traded on stock exchanges. ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold throughout the day on stock exchanges while mutual funds are bought and sold based on their price at day's end.

Equity & ETFs
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Equity & ETFs

Types of ETFs

Bond ETFs

Bond ETFs are used to provide regular income to investors. Their income distribution depends on the performance of underlying bonds. They might include government bonds, corporate bonds, and state and local bonds altogether also called municipal bonds.

Stock ETFs

Stock ETFs comprise a basket of stocks to track a single industry or sector. For example, a stock ETF might track automotive or foreign stocks. The aim is to provide diversified exposure to a single industry, one that includes high performers and new entrants with potential for growth.

Industry ETFs

Industry or sector ETFs are funds that focus on a specific sector or industry. Like an energy sector ETF will include companies operating in that sector. The idea behind ETFs is to gain exposure to the upside by tracking the performance of companies operating in that sector.

Commodity ETFs

As their name indicates, commodity ETFs invest in commodities, including gold, silver, crude oil, energy, natural gas etc. Commodity ETFs provide several benefits. First, they diversify a portfolio, making it easier to hedge downturns. For example, commodity ETFs can provide a cushion during a slump in the stock market.

Currency ETFs

Currency ETFs are pooled investment vehicles that track the performance of currency pairs, consisting of domestic and foreign currencies. Currency ETFs serve multiple purposes. They can be used to speculate on the prices of currencies based on political and economic developments for a country.

Inverse ETFs

Inverse ETFs attempt to earn gains from stock declines by shorting stocks. Shorting is selling a stock, expecting a decline in value, and repurchasing it at a lower price. An inverse ETF uses derivatives to short a stock. Essentially, they are bets that the market will decline, so the investors must always be aware of it.

Benefits

Diversification

One ETF can give exposure to a group of equities, market segments, or styles. An ETF can track a broader range of stocks, or even attempt to mimic the returns of a country or a group of countries.

Immediate Reinvestment

The dividends of the companies in an open-ended ETF are reinvested immediately, whereas the exact timing for reinvestment can vary for index mutual funds and the ETF investment.

Limited Capital Gains

ETFs can be more tax-efficient than mutual funds. As passively managed portfolios, ETFs (and index funds) tend to realize fewer capital gains than actively managed mutual funds.

Lower Discount

There is a lower chance of ETF share prices being higher or lower than their actual value. As the ETFs trade throughout the day at a price close to the price of the underlying securities.