Last week I answered your question, “Why do you like and write so much about Exchange Traded Funds?” Today, I will list and explain the different types of ETFs and give examples of each. When discussing Exchange Traded Products, they contain both Exchange Traded Funds and Notes. I will discuss the difference between ETFs and ETNs in an upcoming column.
1. United States Market Index ETFs track a major market index. They are some of the most active ETFs designed to emulate an underlying index. Typically, these funds have extremely low expenses.
Examples: SPY S&P 500; QQQ NASDAQ 100; DIA DOW-INDUSTRIALS.
2. Foreign Market Index ETFs track major international indexes. These ETFs can offer International exposure by country or region. These funds include some of the largest and most profitable companies in the country.
Examples: FXI China; EWJ Japan; EWW Mexico; IEV Europe 350; VEU All World ex-US; IOO S&P Global 100; EEM Emerging Markets.
3. US Sector and Industry ETFs generally track a sector index representing certain market sectors/groups. These funds are used to gain exposure to certain market sectors/groups instead of investing in individual companies. In this group, I can track when the institutions are moving into or out of a sector.
Examples: XLE Energy; XLF Financial; XLI Industrials; XLB Materials; XLK Technology; XLP Consumer Staples; XLV Health Care; XLU Utilities; XLY Financial Consumer Discretionary.
4. Commodity ETFs are similar to industry ETFs, targeting specific commodity groups. Some funds do not actually buy the commodity, but trade derivative contracts in order to emulate the price of the underlying commodity. The funds can be alternatives to trading in the futures markets.
Examples: USO Oil; GLD Gold; SLV Silver; JO Coffee; SLX Steel; PHO Water.
5. Style ETFs track a specific investment style (value or growth) or market capitalization (large-cap, small-cap, mid-cap). Style ETFs are actively traded in the United States and track indexes developed by S&P/Russell/Vanguard, for example. Typically, these funds have extremely low expenses.
Examples: OEF S&P 100 Large Caps; IJH S&P 400 Mid-Caps; IJR S&P 600 Small Caps; IVE S&P 500 Value; IVW S&P 500 Growth; VV Vanguard Large Cap; VO Vanguard Mid-Cap; VB Vanguard Small Cap.
6. Bond ETFs. There are many types of bond funds, i.e. International, government, and corporate. Be careful with thinking there is always an inverse relationship to equities and bonds.
Examples: Corporate Bonds PHB PowerShares High Yield Corporate Bond Fund; U.S. Treasury Bonds ITE SPDR Lehman Intermediate Term Treasury Fund; Municipal Bonds TFI Municipal Bond Fund; Inflation-Protected Bond (TIPS) TIP iShares Barclays TIPS Bond Fund; Broad Bonds AGG iShares Barclays Aggregate Bond Fund; Short-Term Bonds BSV Vanguard Short-Term Bond Fund; Intermediate-Term Bonds IEF iShares Barclays 7-10 Treasury Fund; Long-Term Bonds BLV Vanguard Long-Term Bond Fund; International Bonds BWX International Treasury Bond Fund; Junk Bonds JNK Barclays Capital High Yield Bond Fund.
These are just six categories of these very popular funds. Next week, I will cover another group to consider when designing your portfolio. Once again, it is not just being in the market that is important. It is what you are in and when that is.