What is ETF?
It is a matter of curiosity for many people what the ETF is, which we have heard about frequently lately. The Turkish translation of the term, which stands for "Exchange-Traded Funds", means "exchange traded fund". ETF, a type of security that can be traded on the stock exchange; any index, sector, commodity, etc. By tracking assets, it can be bought and sold on the stock exchange like a regular stock.
An ETF can be structured to track anything from the price of a single commodity to a large and diverse collection of securities. ETF share prices fluctuate all day due to their tradability. The price changes throughout the day as shares are bought and sold in the market. In this respect, it differs from mutual funds, which trade only once a day after the market closes. It also tends to be more affordable and liquid compared to mutual funds.
ETF; It can include any type of investment, including stocks, commodities or bonds. Some of these may be local, while others are international. Since it has a lower expense ratio, it is more advantageous than purchasing stocks one by one. It is a type of basket-like fund that, unlike stocks, has multiple assets. Because an ETF has multiple assets within it, it can be a popular choice for diversification.
ETF Types There are various types of ETFs that can be used for speculation, income generation, price appreciation, or to hedge or partially offset risk in an investor's portfolio. You can find the details of these types and their descriptions below.
Bond ETFs Bond ETFs are used to provide regular income to investors. Income distribution depends on the performance of the underlying bonds. Government bonds may include state and local bonds, called corporate bonds and municipal bonds. Unlike their underlying instruments, bond ETFs have no maturity date. It usually trades at a premium or discount to the actual bond price.
Stock ETFs Stock ETFs consist of a basket of stocks to track a single industry or sector. For example, a stock ETF might track automotive or foreign stocks. The aim is to provide diversified exposure to a single industry that includes high performers and new entrants with growth potential. Unlike stock mutual funds, stock ETFs have lower fees and do not involve actual ownership of securities.
Industry ETFs Industry or sector ETFs are funds that focus on a specific sector or industry. For example, an energy sector ETF will include companies operating in that sector. The idea behind industry ETFs is to gain exposure to the rise of that industry by tracking the performance of companies operating in that sector. One example is the technology sector, which has witnessed an influx of funds in recent years. At the same time, in an ETF, the downside of volatile stock performance is also reduced because they do not involve direct ownership of securities. Industry ETFs are also used to move in and out of industries during economic cycles. Commodity ETFs Commodity ETFs invest in commodities, including crude oil or gold. There are several benefits that commodity ETFs provide. First, they make it easier to hedge against crises by diversifying a portfolio. For example, commodity ETFs can provide a cushion during a decline in the stock market. Second, owning shares in a commodity ETF is cheaper than physically owning the commodity. This is because the former does not include insurance and storage costs.
Currency ETFs Currency ETFs are pooled investment vehicles that track the performance of currency pairs consisting of domestic and foreign currencies. These types of ETFs serve multiple purposes. It can be used to speculate on the prices of currencies based on political and economic developments for a country. They are also used to diversify a portfolio or as a hedge against volatility in forex markets by importers and exporters. Some are also used to hedge against the threat of inflation. There is also an ETF option for Bitcoin.
Inverse ETFs Inverse ETFs attempt to profit from stock declines by shorting stocks. Selling a stock, waiting for a decline in its value, and buying it back at a lower price is called shorting. An inverse ETF uses derivatives to short a stock. When the market declines, the inverse ETF increases by a proportionate amount. The point to note here is that the inverse ETF is not actually a real ETF, but an exchange-traded ETN. An ETN is a bond but is traded like a stock and is backed by an issuer such as a bank.
How to Start Investing in ETFs? With numerous platforms available to investors, investing in ETFs has become quite easy. Steps to take to start investing in ETFs
