What are the Types of ETFs?

4 mins read
by Angel One
ETFs are investment options that park funds in equity, bonds, commodities, etc. Here, we discuss different types of ETFs and how to choose one.

Numerous financial assets are available in the market, which could assist you in building a portfolio with attractive returns. While some offer high returns at high risks (like stocks, mutual funds, etc.), others provide moderate returns at medium risk, like debt instruments. Yet others aim to offer liquidity. In this article, let’s explore Exchange-Traded Funds (ETFs), their types, and how to choose the right one for you.

What is an ETF?

Exchange-traded funds, or ETFs, are financial options that hold a basket of securities like bonds, equities, commodities, etc. Most ETFs passively monitor an index that serves as a benchmark, like the Nifty 50. ETFs are a low-cost cross between stocks and mutual funds due to their diversified structure and ability to trade intraday on an exchange. 

What are the Different Types of ETFs?

Now that you are well-versed on ETFs and how they operate, it is time to switch to ETF types:

Equity ETF

Most of the time, equity ETFs, also called stock ETFs, follow an index of stocks, such as the Nifty 50 index. Market capitalisation, investment style, strategy, and regional exposure are the basis for categorising various equity ETF types. Thanks to the growth of ETFs, investors now have an affordable option to diversify their portfolios. There is an ETF for anything, whether you want to invest in a specific industry, a small market, or a specific section of the global stock market.

Fixed-Income ETF

Fixed-income exchange-traded funds invest in fixed-income securities such as corporate bonds or treasuries. Allocating a portion of your portfolio to such ETFs helps diversify and enjoy an additional source of income while also lowering the volatility of a portfolio.

Commodity ETF

A commodity stock ETF invests in the stocks of commodity producers, while a commodity ETF tracks the price movements of commodities like gold or oil.

Currency ETF

Currency ETFs track the relative value of a currency or a basket of currencies. These give retail investors exposure to the forex market through a professionally managed fund without having to trade independently. Investors frequently utilise currency exchange-traded funds (ETFs) to profit from currency price fluctuations between one country and another or a group of countries.

Real Estate Investment Trust (REIT) ETF

REIT ETFs invest a large portion of their assets in REIT stocks and related derivatives. These ETFs are passively managed, meaning the fund manager invests in REIT-index constituent stocks.

Multi-asset ETFs 

Exchange-traded funds (ETFs) that invest in multiple asset classes, such as a combination of stocks and bonds, are known as multi-asset ETFs. These funds are often designed to generate a diversified portfolio inside a single investment. Many multi-asset ETFs combine many other ETFs into one portfolio. 

Alternatives ETFs

These employ alternative investment methods like private equity or hedging and often don’t fit into the traditional categories of ETFs. These special funds typically give investors access to market segments they might not otherwise have.

Sustainable ETFs

Sustainable ETFs also referred to as ESG ETFs, are exchange-traded funds that frequently follow the performance of an index of stocks or bonds issued by businesses that meet specific environmental, social, and governance standards. 

Which is the Best ETF for Me?

It is entirely up to you which ETF to invest in. You are required to recall your investment goals and the amount of risk you are willing to take to achieve those goals. As with any investment, you must comprehend the risk-return ratio of each ETF. You can consult a financial professional who can assist you in determining which ETF would best suit your investment requirements. 

How to Invest in ETF?

The investment in an ETF involves a few major steps listed below:

Step 1: Open the Angel One app or website. Step 2: Select ETF on the home page.

Step 3: Choose the ETF you want to invest in.

Step 4: Select a one-time order or SIP. Step 5: Place your order.

FAQs

What is an ETF fund?

ETFs, or exchange-traded funds, are investments that typically follow an index and trade on exchanges. When you purchase an ETF, you get access to a group of assets that you can buy and sell during trading hours. As a result, you will be reducing risk and diversifying your portfolio in an efficient manner.

How to invest in ETF in India?

ETFs are traded on the stock exchange trades. To invest in ETF, you are first required to open a Demat account and a trading account.

Can we get a dividend on ETF?

ETFs do not directly pay dividends to investor depending on their earnings, unlike some stocks. An investor who wishes to benefit from dividends can select an ETF that concentrates on stocks that pay dividends.

Should you invest in ETFs?

ETFs are a cheap method to gain exposure to the stock market. They offer liquidity and real-time settlement because they are listed on an exchange and traded similarly to stocks. Because they replicate a stock index and offer diversity as opposed to investing in a select few stocks, ETFs are a low-risk option.

What is the difference between mutual funds and ETFs?

ETFs can be traded throughout the day, like stocks. However, mutual funds can only be bought at the close of each trading day based on a price calculation known as the net asset value. This is a key distinction between the two.

How do ETFs Work?

ETFs pool investors’ money to purchase a diversified portfolio of assets, mirroring a specific index or asset class. Investors can buy or sell on stock exchanges across a particular trading day. Hence, this will result in liquidity and flexibility for investors. The objective of ETFs is to track the performance of their underlying index, offering instant diversification and cost-effectiveness due to typically low expense ratios.

What are the benefits of investing in ETFs?

You can purchase and sell at any time of the day, unlike other mutual funds that only trade at the end of the day. Investors can place order types (like limit or stop-loss orders) that mutual funds cannot because they are traded like stocks. ETFs generally tend to have low expense ratios and fewer broker commissions.

What are the risks associated with ETFs?

Despite their benefits in terms of diversification, these are subject to market risk, just like stocks and other mutual funds. If an ETF is infrequently traded due to the broad bid or ask spreads, you will buy at the spread’s high price and sell at the spread’s low price. Diversification is impeded by ETFs that are sector-specific.