Other Financial Instruments
Exchange traded funds (ETFs) are funds that can be traded like stocks. In other words instead of buying or selling a specific asset, you are trading a collection of assets that the fund invested in. Shareholders own a portion of the ETF but not the underlying assets.
ETFs are usually characterized by the type of underlying assets or that they hold. Here is the breakdown of most common types of ETFs:
Bond ETFs: Mostly hold different types of bonds (government, corporate, municipal, etc)
Industry/Sector ETFs: Hold assets from a specific industry, like technology, energy, etc. For industries, refer to the market overview in a previous unit.
Commodity ETFs: Usually tracks the prices of specific commodities, like gold.
Currency ETFs: Focus on foreign currencies, like the Euro.
Inverse ETFs: Try to gain the market by shorting stocks.
International ETFs: Track foreign stocks and are an easy way to invest in foreign markets.
Pros and Cons of ETFs
Like any other investment ETFs have their upsides and their downsides. Among their pros we can consider diversification, transparency, and tax benefits. ETFs have their stake on many companies and hold a diverse portfolio that would take a lot of time and effort to build up individually. In addition, it is easy to track the price that a specific ETF trades at and their holdings. In the United States, you are also only taxed once you sell your share of the ETF rather than the entire time you hold that investment. Among the cons, we find the trading costs, the hassles of selling them and the risk that an ETF will close. Some ETFs may choose to charge commission fees for online brokers. Also, once you decide to sell your ETF share it may be hard to find a buyer. If an ETF does not perform well enough to cover its administrative costs, it may decide to close (possibly at a loss).