If you’re looking to invest, you might have heard the word “ETF” thrown around in conversation. But what does ETF stand for? And what is an ETF when it comes to investing?
Generally speaking, an ETF is a type of investment that tracks a particular market or segment. An ETF can be as simple as monitoring the price of gold or something more complex such as tracking the pricing of tech stocks. However, most people use ETFs as a way to invest in a particular market without having to purchase shares of each company in that market directly.
An ETF can also serve as a way to balance out investments between risky and less-risky assets. There are several types of these exchange-traded funds. Here’s what they mean and how you can use them in your investing strategy:
Exchange-Traded Fund Basics
ETF is an acronym for exchange-traded fund, which is a fund that tracks a particular market or segment, such as stocks, bonds, commodities, or a basket of different assets. They are open-ended funds bought and sold on a stock exchange during the trading day like stocks, with their prices changing throughout the day as shares are bought and sold.
ETFs are similar to mutual funds but are cheaper and often trade throughout the day like stocks. These funds are passively managed, which means they are not actively sold like other funds that a human fund manager manages. Instead, a computer algorithm is used to track the fund’s index, which is a basket of stocks or other assets that the ETF is trying to mimic.
However, ETFs are usually lower-cost than mutual funds because there is no fund manager to pay, and the fund can be traded throughout the day.
Let’s take a look at the various types of ETFs you can expect to come across:
Equity ETFs
One of the most common types of ETFs is an equity ETF, which tracks the price of stocks. You can buy an equity ETF that follows a certain sector of stores, such as technology stocks, or an equity ETF that tracks a primary index, such as the S&P 500.
For example, an investor who is more conservative and doesn’t want a lot of risk in their portfolio may choose to invest in an ETF that tracks a broad index, such as the S&P 500. An investor who is more aggressive and wants more risk in their portfolio may choose to invest in an ETF that tracks a sector of stocks, such as technology stocks.
Bond ETFs
Bond ETFs track the price of bonds. When you buy a bond ETF, you are investing in a basket of different bonds that governments and companies around the world issue.
One difference between investing in an ETF that tracks the price of stocks and an ETF that tracks the price of bonds is that with stocks, you can make money when the price goes up, but with bonds, you make money when the price goes down.
Commodity ETFs
Commodity ETFs track the price of commodities, such as gold, oil, or natural gas. One thing to note about commodity ETFs is that they sometimes do not track the price of the items themselves — they track the future price of a commodity.
If an investor takes a long position, they are making a bet that the price of the commodity will go up. If an investor takes a short position, they are making a bet that the cost of the item will go down.
In Conclusion
Know that you know what ETF is an acronym for; you can invest wisely. When you invest, you’re choosing to put your money into something that has the potential to make money for you. As you can see, there are many different types of ETFs, each designed to track another market segment.
The most important thing to understand when deciding if ETFs are suitable for you is to know what type of ETF you’re investing in.
