What is an Exchange Traded Fund (ETF)?

Exchange traded funds, which are among the securities on the stock exchange, are called ETFs. This type of fund, whose full definition is Exchange Traded Funds, can be bought and sold on the stock exchange, just like normal stocks.
Exchange-traded funds can be structured to track different instruments, from a single commodity to several types of securities. Share prices fluctuate throughout the day, just like normal stocks. However, it is more affordable and liquid compared to normal funds.
So, what does ETF do and what are its types? Let's explore the curious details about exchange-traded funds together.

What is ETF and How Does It Work?

ETF can be defined as a basket of securities that can be bought and sold through brokerage firms authorized by the CMB. Relevant funds traded on the stock exchange allow investing in different types of securities and different investment instruments.
Combining the versatile structure of securities trading with the fund diversification feature, funds promise users flexible solutions for investing. Exchange-traded funds include prominent investment instruments such as commodities, stocks, bonds, gold, foreign currencies and bonds. In other words, you can invest in dozens of different stocks by purchasing these funds. For example, stocks of many industrial companies are included in funds targeting the industrial industry.

What Does ETF Do?

ETF funds provide various investment opportunities to individual and corporate users. The main functions of the relevant funds are as follows:

• It is preferred by investors to access different asset classes and diversify their portfolio.
• It provides access to many alternative investment types such as foreign market investments and leveraged transactions.
• Compared to other funds, it gives users the opportunity to focus on different industries and markets.
• It is lower cost.

Advantages and Disadvantages of ETFs

It is one of the main advantages of ETFs, apart from lower transaction cost. It is more costly for investors to buy stocks in a fund separately. Only one transaction is required to buy and sell funds. However, a separate commission must be paid for each stock purchase and sale transaction. The main expense items of the funds are management and fund operating expenses.
You can examine other advantages and disadvantages of ETFs in the table below:
Advantages
Disadvantages
Access to many stocks in different sectors
High prices of funds managed according to active management strategy
Low costs and the opportunity to pay less commission
Funds targeting a single market offer limited investment opportunities
Risk management through portfolio diversification method
Liquidity problems prevent transactions
Opportunity to receive funds for targeted markets

ETF Trading

Exchange-traded funds can be bought and sold through online broker employees and traditional dealers. Additionally, there are robo-advisors as an alternative to regular intermediaries.
Investors have the opportunity to buy funds and sell them during the day, just like buying stocks, through brokerage firms . It is possible to create different types of funds where different stocks are collected together depending on their characteristics.

How to Buy ETF? How to Start Investing in ETFs?

Investors have the opportunity to invest in many different assets in the stock market. The processes that those who want to invest in the funds must follow are as follows:
ETFs are included in many investment platforms and bank investment vehicles. You can easily make purchases by selecting the fund type you want through investment applications.
The number of investment funds in the stock market is quite high. For this reason, before making your investment, you should do research and find the type of fund that is suitable for you. Before the research, you should decide on the time period you have determined and whether you prefer to invest in the fund for income or growth. Additionally, you can include the investment instruments and industries you are interested in in the decision-making processes.

How Does an Exchange Traded Fund (ETF) Profit?

Earnings rates of exchange-traded funds vary according to different criteria. The price at which it is purchased and how long it will be kept as an investment instrument are factors that directly affect the return on investment.
ETFs are similar to stocks in terms of their content and the platform on which they are traded. Funds that can be bought and sold during the trading hours of the stock market have the opportunity to be evaluated in the short, medium or long term . Just like with stocks, diversifying your portfolio allows you to minimize risk.

ETF Types

Exchange Traded Funds may have different characteristics. The most preferred types in the market are as follows:

Passive Equity ETFs

Passive equity funds based on different indices such as S&P 500 or Dow Jones can be preferred to invest in more than one asset. The relevant funds are a mix of financial instruments such as stocks and commodities, differentiated by risks, objectives and depth.
Niche passive equity funds focus on investment instruments within a single sector or industry. These types of ETFs are suitable for investing in promising niche sectors.

Active Equity ETFs

Active equity funds controlled by portfolio managers are often tailored to a specific market. These funds, where managers can take initiative and go out of the index, allow managers to include their own choices in the fund. It has higher investment risk compared to fixed income ETFs.

Fixed Income ETFs

Fixed income fund types, which contain more bonds than stocks, are the choice of those who want to have a stable portfolio. Low-risk ETFs offer an alternative path for investors seeking fixed income.

Bond ETFs

Bond investment funds, which include government bonds, corporate bonds and mortgage-backed financial instruments, advance depending on the performance of the bond types. This investment option, which has no maturity date, is traded at a discount rate on its real price.

Stock ETFs

Focusing on a single sector, stock ETFs gather new, growth-oriented and high-performing companies under one roof. Related funds that hold multiple stocks come with lower fees than standard stock investments.

Industry ETFs

Industry ETFs, which target a specific sector, contain stocks of companies operating in that sector. These investment alternatives, which track the performance of companies in the relevant industry, are less affected by volatile stock performance because they do not involve direct ownership of the asset.

Commodity ETFs

Commodity funds that invest in different commodity instruments such as crude oil and gold provide users with an advantage in portfolio diversification . Relevant funds protect investors, especially in times of crisis, and prevent losses in stock market declines. Assets that offer lower costs than physically owning a commodity are an ideal investment alternative for commodity investors.

Currency ETFs

Exchange-traded funds, which hold a mix of domestic and foreign currencies, focus on the performance of currency pairs. Currency ETFs have different purposes. In addition to being preferred by import/export companies against fluctuations in Forex markets, it also allows protection against inflation. There is also a Bitcoin option for assets used for speculation based on political and economic developments.
Frequently Asked Questions
What is the difference between ETFs and stocks?
ETFs are funds that hold many different assets (stocks, bonds, etc.). In contrast, stocks represent a certain percentage of ownership in a company.

What is a dividend ETF?

Dividend ETFs are exchange-traded funds that invest in stocks of companies that pay particularly high dividends. You can also take a look at our article to get information about the concept of dividend .

What does leveraged ETF mean?

Leveraged ETFs use financial derivatives and borrowing methods to increase the daily return of a particular index or asset class. These types of ETFs aim to offer investors high returns by multiplying the performance of the index by a certain leverage ratio.