ETF is short for Exchange Traded Fund. It is a fund that is listed on an exchange, e.g. the New York Stock Exchange or the London Stock Exchange. Shares in the fund can be bought and sold at the exchange, in way very similar to buying and selling stocks.
Since the ETF is traded throughout the day, its share price will fluctuate with market demand and supply, just like we are used to seeing the share price of listed stock companies fluctuate throughout the trading day. (Compare this to a traditional mutual fund, where the fund share price is normally updated only once a day, at the close of the trading day, and where the share price is based on the value of the investment portfolio and the number of outstanding fund shares.)
Diversification
Why invest in funds? Many people like to invest in funds because they want diversification and want their investment to be professionally managed. This can be achieved in various ways, including traditional mutual funds and exchange traded funds (ETF).
When you chose among the many available funds, it is important to look at the prospectus to find out more about the fund. Just like mutual funds, ETF:s comes in a variety of configurations.
Do you want an ETF that only invests in one type of security (e.g. only company shares or only bonds) or do you want more diversification (e.g. company shares, bonds, forex, commodities, other funds, etc).
Do you want an ETF that specializes on a certain industry or sector? There are for instance ETF:s that only buy shares in companies active in the energy industry, biotech, or financial services, respectively.
Do you want an ETF that specializes on a certain country or geographical region?
Do you want an ETF that aims to track an index? The goal of an Index ETF is to provide investment results that (before expenses) generally correspond to the price and yield performance of the target index. Some examples of well-known Index ETF:s are the SPDR S&P 500 ETF (tracking the S&P 500 Index), the SPDR Dow Jones Industrial Average ETF (tracking that index), the iShares Russell 2000 (IWM) ETF which tracks the Russell 2000 small-cap index, and the Invesco QQQ ETF which tracks the index Nasdaq 100.
Bond ETFs
Bond ETF:s are sought after by investors looking for regular income and fairly low risk. Bond ETF:s are available with various risk profiles. Some invest only in government bonds, while others diversify by including other bond types, such as corporate bonds, state bonds and municipal bonds. While bonds have a maturity date, Bond ETF:s do not.
Commodity ETFs
Commodity ETF:s speculate on commodity prices. They can for instance have exposure to commodities such as gold, silver, crude oil, wheat, corn, soy beans, etcetera.
Some investors use Commodity ETF:s to cushion their overall investment portfolio in the event of slumps in the stock market.
If you want actually physically backed Commodity ETF:s, one option is the iShares Silver Trust (SLV) which actually holds silver bullions. You prefer gold? Check out the SPDR Gold Shares (GLD). Never neglect to read the fine print to find out how much physical backing a ”physical” Commodity ETF actually has, and how it is handled.
Currency ETFs
Currency ETF:s track the performance of currency pairs. They are chiefly used to speculate on price movements, but is also popular among investors who wish to hedge themselves and reduce currency risks.
Nowadays, you can even find Crypto-Currency ETF:s. When ProShares began trading of the Bitcoin Strategy Fund on October 19, 2021, it was the first Bitcoin ETF to trade on an exchange in the United States.
ETF:s for ”selling short”
Instead of buying company shares hoping they will increase in price, some ETF:s focus on shorting instead, e.g. hoping for the shareprice to fall. This type of ETF is known as an Inverse ETF, and can be a great way to profit from falling markets.
Important: You may also encounter Exchange Traded Notes (ETN:s) within this field. They are not the same as ETF:s. An ETN is a bond, but trades like a stock and is backed by an issuer (e.g. a bank).