ETF Categories

ETF (Exchange Traded Funds) are becoming more and more popular with the private investors - and should quite rightly be so. Because these funds are not actively managed by a fund manager but managed using passive models by an underlying stock index, the cost of investing is much lower and the use of multiple stocks per index also provides for portfolio diversification.

Let me just point out a famous quote from Warren Buffett, probably the most successful investor of our time:

"A low-cost index fund is the most meaningful equity investment for the vast majority of investors, and my mentor, Ben Graham, took that position many years ago, and everything I've seen since has convinced me of that truth." - Warren Buffett

ETFs are also a very safe investment since the money invested belongs to the special fund and is protected in the event of an insolvency of the fund company.

The underlying indices will be ranked according to different criteria. One example is the DAX (German stock index), which represents 30 listed stock corporations.

Just like stocks, ETFs are traded on the stock market.

Depending on which type of index the ETF is replicating or on the different special forms of index replication, they are grouped into different subgroups/categories.

Types of ETFs:

  • Index ETF
  • Asset classes ETF
  • Commodity ETF
  • Sectors ETF
  • Inverse ETF
  • Leveraged ETF

Below we have explained each of the individual ETF categories in a reduced form. For a detailed information on each ETF category, there are separate links to related articles.

Index ETF

In principle, of course, country-specific ETFs are similar to all Index ETF funds. To find the right ETF index, you should look for an index that fits your investment needs and initial situation. There are more risk-prone or lower-risk options, physical and synthetic ETFs. The indices can also be divided into countries or regions.

The main differences between the indices are the number of participation and the size of the companies. Here, the companies are weighted in a stock according to criteria such as dividend yield, the price-earnings ratio, etc.

For example, regional indexes can be:

  • Africa ETFs
  • Asia-Pacific ETFs
  • Asia Pacific ETFs (excluding Japan)
  • Europe ETFs
  • Gulf States ETF
  • Latin America ETFs
  • North American ETF
  • Eastern Europe ETFs
  • Emerging Market ETFs
  • Scandinavia ETFs
  • World ETFs

Asset classes ETF

Most people think of equities as the asset class; so that the ETF replicates a stock index. However, that is far different from that, because there are also ETFs that replicate the performance of other investment indices.

In addition to the stock indices already discussed, there are three other important asset classes for ETF investors (we have dedicated a small chapter to the Commodity ETF):

  • Money / Currencies ETFs

    Cash is the most liquid and secure investment and its value does not fluctuate with market prices. However, therefore, yields are much lower and in some cases even negative due to inflation. ETFs replicate the index of a specific currency here.

  • Bonds ETFs

    Bonds are similar to bonds. The investors thus provide the issuer with a loan for a certain period of time. In addition to the amount lent, they receive back the payment on predetermined interest. After the issue, bonds are traded freely, which is why their prices fluctuate daily. For ETF investors, there are several bond indices to choose from.

  • Real estate ETFs

    Investors usually invest in the commercial real estate such as offices and shopping centres.In addition to the increase in value, rental income can also be recorded positively. ETF investors do not invest their money directly in real estate but prefer to invest in listed real estate companies.

Here are the common subcategories of asset classes ETFs:

  • Bond ETFs
  • Aggregate bond ETFs
  • High yield ETFs
  • Inflation-linked bond ETFs
  • Investment grade bond ETFs
  • Government bond ETFs
  • Corporate bond ETFs
  • Convertible Bond ETFs

Commodity ETF

The ETF investor has several interesting and widely distributed commodity indices available. Investing in commodities is easy and straightforward with ETF. Direct investing in commodities via futures is usually not for private investors.

The performance of an ETC (Exchange Traded Commodities) is determined either by the spot price (price for the immediate delivery) or the futures price (price for the future delivery) of a single commodity or a whole resource basket.

You can not invest in a single commodity with an ETC. This is because the law requires a minimum amount of diversification in the ETF Portfolio. In addition, ETFs are not allowed to hold any physical commodities.

However, an ETF can contain only commodities of a certain kind. An example of this would be the so-called soft commodity ETFs, which only contain commodities from the agricultural sector.

Here are some of the indices whose performance is replicated by ETC:

  • Agricultural companies
  • Precious metals basket
  • Energy companies
  • Renewable energy
  • Industrial Metals
  • Raw materials basket(wide)
  • Raw materials basket without agricultural sector

Sectors ETF

With Sectors or Industry ETFs, an investor can invest in stocks of a single industry. Of course, this is very well suited to diversify the portfolio. There are two internationally recognized industry classification schemes - the GICS or the ICB - for assigning the different shares to an industry. Examples are the following ETF options:

  • Agricultural equity ETFs
  • Automobile ETFs
  • Banks ETFs
  • Consumer Staples ETFs
  • Cyber Security ETFs
  • Retail ETFs
  • Energy ETFs
  • Renewable Energy ETFs
  • Financial Services ETFs
  • Healthcare ETFs
  • Houseware ETFs
  • Industrial Goods ETFs
  • Infrastructure ETFs
  • Media ETFs
  • Food and Beverage ETFs
  • Technology ETFs
  • Telecom ETFs
  • Insurance ETFs
  • Utilities ETFs

Inverse ETF

The classification into this category is based on the fact that these ETFs reflect the inverse performance of the underlying index. Originally, inverse ETFs were intended to hedge the stock portfolio. This type of ETF is also often called Short Term ETF because they are not meant to be long-term investments.

Short ETFs are closely related to the leveraged ETF (see the corresponding chapter) and also appear in combination as an Inverse Leveraged ETF.

Short ETFs are extremely speculative investment instruments designed for short-term trading on a daily basis and involve risks that a private investor can not normally reasonably assess.

Inverse ETF is an open-end product. There are no time limits and investors can, therefore, get on and off at any time. The underlying short index is structured in such a way that its return relates to a short period of time. Therefore, the calculation is normally made daily.

You can read more about this in the corresponding detailed article on our website.

Leveraged ETF

The English verb "to leverage" means pry. For example, the returns of a leveraged ETF can be leveraged by several factors. This means that the Leveraged ETF will double the 10% increase in the underlying index, down from 20%.

But of course, the reverse is also true. If the index falls by 10%, the ETF falls by 20%. Leveraged ETF are given by factor, e.g. Gold ETF x2, Direxion 3x, ETF x3, ETF Dax Short 4x, ETF DAX 2x Long, etc.

The leveraged ETFs track the performance of an index daily. It can be said in the technical terms that the position is closed. This also leads to the phenomenon called path dependence. You can find a clear mathematical calculation example in the detailed article on Leveraged ETF

Leveraged ETFs, like inverse ETFs, carry a significant degree of risk and should be handled with care.

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