There are many types of ETFs or “Exchange Traded Funds”. Let’s start with the three basics. These are exchange traded:
- open end index mutual fund (passively managed)
- unit investment trust, abbreviated UIT (actively managed)
- guarantor trust
The term “exchange-traded” means that the funds are traded on the stock market. By contrast, shares of standard mutual funds are bought and sold through the company that manages the fund.
Shares of ETFs are bought and sold on the market floor, just like an individual stock. But, the items in the ETF portfolio will include a number of different assets. In the open ended ETF, daily profits are automatically reinvested. Share holders receive cash dividends on a quarterly basis.
UITs might be diversified, but they might not. Nothing is done automatically. A management team makes the decisions. The payment of dividends varies. In other words, there are fewer rules.
A grantor trust ETF is more like a standard stock holding. You have a shareholder’s vote and all dividends are paid to you, rather than reinvested.
Most investors are accustomed to making money by buying low and selling high or holding a position for many years and expecting to earn an average of 10% per year. Of course, that didn’t happen in recent years. Many investors lost money. But, historically, that’s what long-term investors have expected.
There is one kind of ETF that does not depend on the value of the stock increasing over time. It is referred to as an “Inverse ETF”. Investing in an inverse ETF means that you profit from a decline in the value of an underlying benchmark, such as the NASDAQ. Two of the inverse ETFs are the NASDAQ 100 and the Russell 2000.
The term “smart” or “intelligent” ETF is sometimes used to refer to funds that are actively managed. The holdings within the fund may be based on a broad index fund, such as the S&P 500, but the management team has the freedom to change the amounts of certain stocks held within the fund or exclude some all together.
Other terms that may be seen alongside the ETF refer to the type of security held within the fund. For example, there are silver, commodity, oil, bond, China, energy, EURO and many other types of ETFs.
Analysts have different ideas about how to pick a truly intelligent ETF, one that earns over the short and long term. The best advice is to be sure that the fund is not too heavily invested in any one area. Diversification is always the smartest choice.