There are some inventions that will go down in history for changing the game. Windshield wipers, fun-size candy bars, and ETFs are just a few. Windshield wipers make it possible for us to drive in the rain and tiny treats make it possible for us to eat several entire candy bars in phases and without shame. And ETFs? Yep. Believe it or not, these super interesting and investor-focused inventions and have only been around for 30 or so years.
Exchange-traded funds, or ETFs, were borne of investors’ love of indexed funds. Index funds are designed to track a specified basket of underlying investments. An ETF is all of those investments packaged together.
What is an ETF?
In its simplest terms, an ETF is a collection of securities that you can buy or sell through a brokerage firm on a stock exchange.
A bunch of securities are bundled together based on some underlying connection—say industry, performance, theme, or geography, for example—and then assigned a ticker symbol and traded like a stock.
ETFs vs. mutual funds
If this all sounds a lot like a mutual fund, you’re kind of right on. The main difference between and an ETF and a mutual fund is found in the ways they are traded and managed. ETFs are traded like stocks, while open-ended mutual funds only can be purchased at the end of each trading day based on a calculated price. These types of mutual funds are actively managed, meaning a fund manager makes decisions about how to allocate assets in the fund.
Additionally, minimum ETF investments tend to be lower than mutual funds. The same goes for the fee structures. Because mutual funds are actively managed by professionals, their costs reflect that.
What are the types of ETFs?
There are about 8,000 ETFs trading globally, with more than 2,500 of them based in the U.S. In that 2,500, there are a few categories. You can break ETFs down into 15 different categories:
- U.S. Market Index ETFs track a major market index in an effort to emulate it, not outperform it.
- Foreign Market Index ETFs provide international exposure while hedging against foreign investment risks.
- Foreign currency ETFs track foreign currency without the hassle of complicated mathematics. Some even track a basket of monies, giving investors access to multiple foreign currencies.
- Industry ETFs, just like they sound, generally track an industry. These are a great way to get exposure to a certain market sector without purchasing shares in multiple individual companies.
- Commodity ETFs are a lot like industry ETFs in that they target certain areas of the market, albeit in a bit more complex model. When you purchase a commodity ETF, you actually buy derivative contracts to emulate the price of the underlying commodity.
- Derivative ETFs do not hold any equities at all. They are made up of derivative contracts like futures, forwards, and options.
- Style ETFs track a certain investment style or market capitalization. They’re like a growth and value index style investment portfolio package.
- Bond ETFs vary, from international to government to corporate. Debt bond ETFs give investors opportunities in the bond market while still maintaining the benefits of ETFs.
- Exchange-traded notes (ETNs) are debt notes issued by major banks. ETNs are backed by high-credit rating banks so they are considered secure investment products.
- Inverse ETFs create short positions when you buy them, by providing inverse reactions to the direction of the underlying index or asset.
- Leveraged ETFs are controversial and best suited for advanced investors. They offer leveraged daily returns on underlying indexes and assets.
- Actively Managed ETFs are the lovechild of ETFs and mutual funds. These combine the benefits of both mutual and exchange-traded funds into one asset while eliminating some of the disadvantages.
- Dividend ETFs track a dividend index.
- Impact ETFs (AKA socially responsible ETFs) track the investment results of an index composed of positive impact companies that derive a majority of their revenue from products and services that address at least one of the world’s major social and environmental challenges as identified by the United Nations Sustainable Development Goals.
- Innovative ETF is the catch-all name for anything that doesn’t fit into one of these categories.
How to discover ETFs to invest in
With the understanding that there is no one-size-fits-all approach to investing, ETFs can be a solid choice for almost any investor. Because of their nature, most ETFs are best for investors with long-term investment objectives and goals with time horizons of three years or more. Other ETF’s, such as leveraged ones, are designed to trade for one day.
Because ETFs are basically bundles of securities, you research and discover them in the same manner. Many ETFs focus on industry, which means that investors who are looking for exposure to areas of the market like healthcare, technology, utilities, and energy have many low-cost ETFs to choose from. Public includes these ETFs in their thematic offerings, all you have to do is search by your interests and voila! Chances are that there is an ETF that suits you.
First things first: Set your intentions. Realizing your objectives is a key part of investing and what will ultimately define your strategy. An investor whose objective is to retire in a few decades will have a different strategy than one who wishes to cash out their accounts in five years. Define your objectives and work your strategy—or strategies—out. This will inform your choices.
From there, an investor might want to go with the popular options that have shown a history of success. In Public, you can see what investors like you are opting for and ask questions about why they made their decision. Through this process, you can learn the language of investing and gather data to inform your own opinions.
Public is a social investing app, which means that you can follow other investors and understand why they are investing in or selling ETFs. This is designed to give you a completely new experience in investing. Talk about your money, share what you’ve learned, and learn from others. You can follow people with professional expertise in different industries (think healthcare, technology, or advertising). This gives you a more diverse view of sector-specific perspectives that can help you better understand how businesses work in worlds outside of your own personal day-to-day experiences.
Cause-related ETFs
Another popular option that investors choose when investing in ETFs is selecting funds based on their passions. When opting to invest in sustainable companies, for example, it can be easier to go with an ETF that has managed and arranged these vetted companies into a fund. Public, for example, offers access to the SHE ETF, which tracks a market-cap-weighted index of US large-cap companies with a relatively high proportion of women in executive and director positions.
Public also offers access to the iShares Global Clean Energy ETF, which is designed to track the performance of approximately 30 clean energy-related companies.
Fractional ETF investing
Public offers fractional investing, AKA stocks in slices, which means you can buy a portion of a stock or ETF that may be out of your price range. You can immediately start investing all cash available in your budget thanks to slices—there’s no minimum and you don’t have to save up to purchase a full share of tock. Great news if you’re looking at shares like Google’s parent company Alphabet, which regularly trades at over $1,000. This logic works for ETFs, too.
Slices allow access to stocks and ETFs you may not have otherwise been able to afford. It also makes it easier to invest with dollar-cost averaging because you can opt to invest with set dollar amounts vs. full shares.
The bottom line
Though not totally free from risk, ETFs are a popular option for many investors. There are so many to choose from with so many different dedicated purposes, there must be one right for you out there. Public offers access to these financial powerhouses to you in slices, so you can invest with your budget in mind. Choosing ETFs is a lot like choosing stocks, so don’t be afraid to lean on the social aspects of Public to learn from other investors and collaborate with the community to inform your own approach.
Past performance does not guarantee future results. Some ETFs, such as leveraged ETFs, can be risky. SeePublic.com/disclosures.