An Exchange Traded Fund (ETF) is similar to a Mutual Fund in the fact that it is a group of stocks that you can buy through one ticker symbol. However, ETFs usually often contain stocks that all have something in common (Such as an index, market, etc.). They are popular for investors who want to trade both in the long-term and the short-term, depending on which ETF you choose to invest in. In this article, we will discuss different types of ETFs and how to trade some of them efficiently.
Index ETFs
One of the most common ETFs that are used/recommended by many investors are Index ETFs. Index ETFs are a group of stocks that are included in one popular index that you can invest in, basically allowing you to invest in an index. One of the most common Index ETFs is the S&P 500 ETF. Three of the most popular S&P 500 ETFs are:
1.) SPDR S&P 500 ETF Trust (SPY)
2.) Vanguard S&P 500 ETF (VOO)
3.) iShares Core S&P 500 ETF (IVV)
Many investors hold onto these ETFs for the long-run, usually for growth in a retirement account/savings. If you are looking for a good place to put your money to grow over a long period of time, the S&P 500 ETF is a great buy. The S&P 500 has an average yearly return of about 10%. It is very common to keep adding to your equity when holding this ETF in order to allow it to keep growing more and more, as well as reinvesting any dividends you may receive. As Warren Buffet once said when you buy the S&P 500 ETF, "You are buying America." However, there are other Index ETFs that follow the Nasdaq, Dow Jones, etc..
Sector ETFs
Sector ETFs are a group of stocks that are within one industry or sector that can be traded all under one ticker symbol. Some investors like this because it allows them to trade a sector as a whole, which minimizes risk. For example, if an investor thinks the Energy sector is going to perform well but wants to minimize risk, they can buy an Energy Sector ETF to try to profit off of this performance.
Many investors like to buy Sector ETFs during a time when certain industries are historically expected to do well. For example, gas/energy is of high demand in the winter due to colder weather. In many years, the gas industry does very well and usually outperforms as a whole. This may cause an investor to buy $XOP, which is the SPDR S&P Oil & Gas ETF.
Another thing that may cause certain Sector ETFs to do well is because of evolving products/a new way of living. For example, with computers becoming more popular over the years, technology stocks have been soaring for the most part. Since the world seems to be moving to a digital state, buying Technology Sector ETFs may help capitalize on this performance in a safe way.
Leveraged ETFs
Leveraged ETFs are ETFs that change by a multiple of some other index. For example, there is $TQQQ, which ProShares UltraPro QQQ. This is a Leveraged ETF of the Index ETF $QQQ (Index ETF of the Nasdaq). In this case, this is a "3x Bull Leveraged ETF." In the most simple terms, if $QQQ increases by 1%, then $TQQQ increases by 3%. However, if $QQQ decreases by 1%, then $TQQQ decreases by 3%. This allows for lots of volatility and is often more popular among Day Traders and Swing Traders. Long-Term Investing these Leveraged ETFs may cause you to end up losing money because if $TQQQ decreases but then increases by the same amount, you are still down money. For example, if $TQQQ is $100/share and then decreases 10%, it is now $90/share. If the next day $TQQQ increases by 10%, then it is $99/share and you are still down 1% total. Leveraged ETFs have a natural decay that make them not very profitable long-term investments.
On the other side of Leveraged ETFs, there are Inverse Leveraged ETFs. These are identified by increasing when the index they follow decreases. As an example, if $QQQ decreases 1%, then its Inverse Leveraged ETF of $SQQQ will increase 3%. Inverse Leveraged ETFs are also called "Bear Leveraged ETFs" and $SQQQ is an example of a 3x Leveraged ETF. These are very popular in times of a decreasing market or when a certain sector does not do well. For example, if the Nasdaq is not expected to do well in the coming days, an investor may buy $SQQQ to profit when most are losing money. Inverse Leveraged ETFs are very popular during recessions or times of uncertainty.
How to Check an ETF's Holdings
If you are interested in finding out which specific stocks are held within an ETF, a quick Google search can help. Often times, the ETF's holdings that are displayed are usually only the largest percentage of the ETF. Below will be an example of the holdings within $SPY on Yahoo! Finance:
As you can see, these are the top holdings of $SPY and contain 27.29% of the total assets. This can help you determine if the ETF is going to do well by doing research into these specific companies and predict if they will perform well or not.
Some Notes to End Off
When deciding if you want to buy an ETF, it is important to rely more on Fundamental Analysis because ETFs do not follow technical indicators as closely as singular stocks do. However, you can use Technical Analysis to determine a good time to buy the stock. Specifically, investors like the determine if the stock is cheap at the time and most commonly use the RSI.
Overall, Long-Term Investors usually favor Index ETFs, Swing Traders usually favor Sector ETFs, and Day Traders usually favor Leveraged ETFs. This is due to each's volatility and safety. Index ETFs may not have the quickest profits, but they are the safest by far. Leveraged ETFs can allow for the highest immediate profit, but can also lead to massive losses that are very difficult to recover from.
It is vey important to do research into an ETF before buying it. Remember to check into the holdings of the ETF, perform Fundamental Analysis, and then utilize Technical Analysis to determine when exactly to buy at a cheap price.