At InvestEngine, we have over 500 ETFs for our investors to choose from when building their portfolios. This could be an overwhelming amount of choice. There are, however, different types of ETFs for investors to be aware of, with each serving a slightly different function.
So, here is a breakdown of the most popular types of ETF to help you get started.
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Equity ETFs track an index of equities. The most popular kinds of equity ETFs track indexes associated with specific countries – the S&P 500 or the FTSE 100, for example. They can also track indexes associated with broader geographical distinctions like Emerging Markets or the Eurozone.
Other types of equity ETF include industry-specific ETFs, which allow you to invest in the S&P 500’s energy companies only, for example. They allow investors to select industries they see doing well at the time, making them a popular choice.
Bond or fixed-income ETFs allow investors an easy route into the bond market. They provide a low-cost, high-liquidity alternative to traditional fixed income investing. Investing in a basket of bonds can provide low-risk diversification for the long-term investor and these have grown in popularity in recent years.
ETFs can also be an effective way to invest in commodities like gold and oil. Historically, commodities have little price correlation with equities, so including a few commodity ETFs in your portfolio could be an effective tool for diversification. You can choose between ETFs that track broad baskets of commodities or ones that track a specific commodity like gold. They can be more volatile than other types of ETF.
As the name implies, currency ETFs will invest in different currencies. This can be a single currency, like the dollar, or a broader range of currencies. People tend to buy currency ETFs if they think a currency is likely to strengthen, or if they want to protect or hedge their portfolios. They will either invest in a currency directly or use derivatives – in some cases, it’ll be a mixture of the two.
ESG stands for environmental, social and governance. This means that they invest in companies based on a set of criteria that will focus on environmental issues, social issues or a broader mixture of both. These ‘socially responsible’ ETFs have become more popular in recent years and they will broadly track an index like the S&P 500 but include an additional layer of ESG ‘screening’ to their selection process. One reason for the growth in popularity has been changing attitudes towards investment and the desire for one’s portfolio to be in line with one’s morals.
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