What are ETFs?
Exchange Traded Funds (ETFs) are publicly-traded securities that tracks a specific index, sector, commodity (e.g. gold), or an underlying collection of assets.
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How Do Exchange-Traded Funds (ETFs) Work
ETFs can be thought of as marketable securities that track the price of assets within a basket of grouped assets, which enables investing in the broader market, sector, region, or asset class.
The value of an ETF is directly a function of the price performance of the collection of assets contained within the index.
The goal of ETFs is not to outperform the broader market nor the underlying index – although it is possible for certain ETFs to “beat the market” – but rather, most ETFs just attempt to replicate the performance of the assets being tracked.
Common Types of ETFs and Market Participants
The various types of ETFs include the following:
- Long ETFs: “Long Positions” Tracking Underlying Stock Indices (S&P 500, Dow, Nasdaq)
- Inverse ETFs: “Short Positions” on Underlying Stock Indices
- Industry/Sector ETFs: Portfolio of Stocks Operating in a Specific Industry or Sector (e.g. Technology, Healthcare, Oil & Gas, Energy)
- Commodity, Precious Metal & Currency ETFs: Invest in Certain Commodities, Precious Metals (e.g. Gold), and Foreign Currency Fluctuations
- Country/Region ETFs: Portfolio of Shares of Public Companies in Specific Country/Region
- Leveraged ETFs: Utilize “Borrowed Funds” to Amplify Portfolio Returns (and Risk)
- Thematic ETFs: Portfolio of Disruptive Stocks with Long-Term Societal Tailwinds (e.g. Clean Energy, Robotics, Electric Vehicles, Cloud Computing)