Exchange Traded Funds are an interesting way to invest in the stock market. They have become much more popular lately, and having only been around for the past 15 years, they are still riding the waves of regulatory adjustment. They are similar to mutual funds in that they represent a batch or basket of assets, but ETFs can be traded on the market as though they were an individually valued stock, which mutual funds cannot do. Here are the basic types of ETFs and some pros and cons of investing in them.
Index ETFs are the most common type, funds that follow a specific index such as the Dow or the S&P 500. Care should be taken when choosing one of these however, as different ETFs vary the percentage of how much of their assets are invested in a particular index. Replicating ETFs invest 100% spread evenly across the index, but not every Index ETF uses that method.
Commodity ETFs are newer, and basically still function as Index ETFs, but for a specific commodity such as gold or silver. This can be an easier method of investing in a commodity rather than purchasing futures or tangible amounts directly, but the caveat here is that these funds are not as closely regulated as other more standard investments.
Currency ETFs are very new (the past 3 years) and now track all major currencies. Personally I’m not sure I see the advantage over direct currency trading for these, but time will tell because they are still developing.
There are other types but these 3 constitute the majority of all ETFs currently. Again speaking from a personal perspective, I am not that fond of mutual funds in general, due to the fees involved and the lack of participation on the part of the investor. ETFs are slightly better and more focused, and still provide a lot of the protection of a mutual fund, by allowing you hold a wide portion of assets with even small amounts of money. ETFs still have expenses due to trading commissions, but overall your money is significantly better protected (from fees) than in a mutual fund. They also provide more protection from taxes. Finally, for the experienced investor, ETFs allow more complicated trades such as shorting, margin orders, or control orders like limit or stop-loss.
As with all investments, you are ultimately putting your money at risk in order to gain a (we hope) substantial reward. Always take the time first to plan your financial goals, learn about your investments, and have an investment counselor or financial advisor to help you with your decisions.
Benjamin J. Miller
