What is an ETF?

ETFs are a fairly new way of buying a large group of shares, assets or other securities at once. ETFs are traded just like stocks; you can buy and sell shares of an ETF throughout the day on an exchange. They are also called exchange-traded funds, which is exactly what they are.

Definition of Exchange Traded Fund (ETF)

ETF stands for Exchange Traded Fund, which is exactly what it sounds like; they are like mutual funds in many ways, but they are traded on a normal stock exchange like a stock, where their value is determined both by the value of the underlying assets and the value of the ETF itself. ETFs are not usually actively managed, instead they act like an index; the fund is established to track a basket of shares or other assets in a particular pre-existing class. An example is the Spider SPY ETF, this fund is based on the S&P 500. This means that all the stocks in the SPY ETF represent a small portion of the stocks of the 500 companies in the S&P 500. Almost every popular stock index has an ETF tracking it these days, but that’s not the only type of index an ETF will follow. There are also ETFs designed to track commodities; for example, USO and OIL are based on the price of oil and companies that mine/refines oil while GLD and SLV track the price of gold and silver respectively. ETFs are very useful because it is an easy way to buy a variety of assets at once; you don’t have to worry as much about trying to ‘beat the market’ if you can buy the SPY ETF and be very close to matching the market’s performance automatically.

Types of ETFs

There are many different types of ETFs, but they all have one thing in common; they are designed to track a pre-existing index of some kind. Here are some of the most popular ones:

Equity index ETFs

These ETFs track an existing stock index and try to replicate its performance. For example, SPY tracks the S&P 500, QQQ follows the Dow-Jones Industrial Average and IWM follows the Russell 2000. There may be multiple ETFs tracking the same index, as ETFs are issued by individual companies, some companies may wish to track the same index as another.

Commodity ETFs

There are also ETFs designed to follow a basket of commodities. These ETFs are very popular with investors who want to buy oil, for example, but don’t want to start trading spot contracts or futures for commodities. Some ETFs in this category are OIL for oil, GLD for gold and SLV for silver.

Volatility ETFs

Volatility ETFs are much more complicated; they are based on the ‘fear’ of the market at any given time. Volatility ETFs are generally based on the VIX volatility index, which measures how much investors expect the market to move over the next 30 days. These are more complex financial instruments, and although anyone with a brokerage account can buy them, they are more difficult to manage and use.

Reverse ETFs

These ETFs work by doing the exact opposite as the ETFs above; their goal is to do the exact opposite of the index that they track. For example, the Inverse S&P 500 ETF SH tries to go down by 1% every time the S&P500 goes up by 1%. They do this through short selling and other financial derivatives. You may be interested in an ETF if you think the index you follow will go down in the short term. For example, you might want to buy an inverse oil ETF if you think the price of oil is about to fall. It’s a very popular way to short for investors who don’t have a margin trading account.

Leveraged ETFs

Leveraged ETFs use a complex set of financial tools to double or triple the index it tracks; JDST, for example, tries to triple the return of the gold index it tracks, on a daily basis. That means if gold goes up 1% today, the JDST ETF will be somewhere near 3%. The opposite is also true, so if the index goes down by 1%, the leveraged ETF will fall by 3 times as much. Reverse leveraged ETFs also exist, which double or triple the inverse of the index that they track. For example, DWTI is a reverse-leveraged oil ETF; when oil goes down by 1%, it tries to go up by 3%.

The difference between an ETF and an equity fund

There are a few main differences between the two, but the biggest one to consider is that mutual funds are actively managed (meaning there is a portfolio manager and a team of analysts who actively buy and sell securities in the fund to try to get the best return given the fund’s purpose). Even if an ETF is not actively managed, it tracks an already existing index. This means that the underlying assets of most ETFs do not change much; the composition of an S&P 500 ETF will not change much over time. Some other key differences are: – ETFs are traded on an exchange, just like a stock – ETFs may have a slightly different value than the net asset value (NAV) of their holdings; this means it may be possible to buy an ETF for slightly less than the value of the securities it represents, providing an opportunity for profit through arbitrage – ETFs typically have lower fees than mutual funds – It is often easier to keep track of the underlying assets of an ETF, as they do not change as much as mutual funds

Other details

Just like a mutual fund, if an underlying asset in an ETF that you own pays a dividend, it is transferred to the ETF holders (so you can receive an ETF dividend). ETFs can also be split; usually this will happen once a year, with all ETFs created by a company being split at the same time.

About the Vikingen

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