ETFs and what must you know about them

Table of Content

1. Understanding ETF

2. Types of ETFs

3. How ETFs work

4. Strategies for ETFs

Understanding ETF

ETF is an 'exchange traded fund' that you buy or sell through a brokerage firm on a stock exchange. ETFs are offered on all asset classes, including investments and commodities. Innovative ETF structures allow investors to short markets, to gain leverage, and to avoid short-term capital gains taxes.

Types of ETFs

• Market ETFs:

  These are designed to track a specific index like a S&P 500 or NASDAQ

• Commodity ETFs:

  These are designed to track commodities like gold, oil, etc.

• Bond ETFs:

  These are designed to track an investment style or market capitalization focus, such as large-cap value or small-cap growth

• Inverse ETFs:

  These are designed to profit from an underlying market or index

• Foreign ETFs:

  These are designed to track non-U. S markets like Japan Hong Kong

• Style ETFs:

  These are designed to track an investment style or market capitalization focus, such as large-cap value or small-cap growth

• Alternative investment ETFs:

  These are ETFs that allow investors to trade volatility or gain exposure to a particular investment strategy, such as currency carry or covered call writing

How ETFs work

ETFs are bought and sold like company stock during the day when the stock exchanges are open. Like in the case of stocks, ETFs also have intraday price data that can be obtained during the day.

But unlike a company stock, the number of shares outstanding of an ETF can change every day due to the continuous creation of new shares and the redemption of existing shares. The ability of an ETF to issue and redeem shares on an ongoing basis keeps the market price of ETFs in line with their underlying securities.

ETFs have a high appeal to investors since you can do intraday trading. There is no sales low, however, broker commissions are applicable. It also gives investors a better control over when to pay their capital gain tax.

Strategies for ETFs

Once you have determined your investment goals, you can invest your assets in a conventional fashion using stock index and bond ETFs, and adjust the allocation in accordance with changes in your risk tolerance and goals. You can also choose to add alternative assets, such as gold, commodities, or emerging stock markets. You also have the option of moving in and out of markets quickly, hoping to catch shorter term swings, much like in case of a hedge fund.

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