Defining Etfs

ETFs are basket assets, in that they allow an investor exposure to an entire sector, in a more unified manner than a mutual fund, which conversely a basket asset that can be any number of distinct stock positions. In a mutual fund one can be exposed to a banking company, an insurance company, and a sporting goods company. In other words a mutual fund is about diversification whereas an ETF is all about uniformity.

Whereas an ETF is a group of positions which are uniform in some way or another, such as a gold ETF may be made up of a company which mines for gold, and another which sells gold jewelry.

Another major difference between a mutual fund and an ETF is that the ETF trades like a stock, therefore it does not have a net asset value like the mutual fund. Also similar in many ways to traditional mutual funds, except that shares in an ETF can be bought and sold throughout the day like stocks.

There are various kinds of ETFs:

An index ETF is easily the most common type of ETF, they track an “index” associated with certain stocks or bonds. An example of an index ETF would be (SPYDR), which tracks the NASDAQ 100. Keep in mind that Index ETFs are not actively managed.

A sector ETFs holding represents an entire segment of an economic market, such as Consumer Goods, or the financial sector.

An industry ETF represents a particular industry, such as manufacturing, and allows investors the ability to track the entire industry.

A country specific ETF tracks the position of an entire economy of an individual country, such as China or India. Whereas some ETFs track a specific region such as South America.

There are also size specific ETFs which are defined by the market capitalization of the individual holdings within the fund. For example, there are large-cap, mid-cap, small-cap, and micro-cap which indicates relative size of the companies that make up the ETF. Large-cap companies are typically defined as larger than $10 billion (Toyota), while mid-cap companies are usually anywhere between $2 billion to $10 billion. Small-cap companies range between $300 million and $2 billion, and micro-cap companies are much smaller, around $50 million to $300 million.

A commodity ETF, tracks the position of a commodity such a copper or oil.

A currency ETF is a lot like trading FOREX, it provides investors the ability to track the position of currencies as the dollar, yen, or yuan.