Types of Exchange Traded Fund
There are six main categories of Exchange Traded Funds (ETFs), organized by their underlying assets and investment strategies.
Main Categories
- Index ETFs — track a specific stock or bond index, such as the S&P 500, and are designed to provide broad diversification and market exposure, with a concrete example being the SPDR S&P 500 ETF Trust.
- Sector ETFs — focus on a specific industry or sector, such as technology or healthcare, and allow investors to target specific areas of the market, with a concrete example being the VanEck Vectors Semiconductor ETF.
- Commodity ETFs — invest in physical commodities, such as gold or oil, or commodity futures contracts, and provide a way for investors to gain exposure to commodity markets, with a concrete example being the SPDR Gold Shares ETF.
- Bond ETFs — invest in a portfolio of bonds, such as government or corporate bonds, and offer a way for investors to gain fixed income exposure, with a concrete example being the iShares Core U.S. Aggregate Bond ETF.
- Actively Managed ETFs — employ an active investment strategy, where the fund manager actively selects securities and makes investment decisions, and are designed to outperform a benchmark index, with a concrete example being the Fidelity Active Equity ETF.
- Leveraged and Inverse ETFs — use derivatives and other financial instruments to provide magnified exposure to an underlying index or asset, and are designed for short-term trading and speculation, with a concrete example being the ProShares UltraPro S&P 500 ETF.
Comparison Table
| Category | Cost | Scale | Speed |
|---|---|---|---|
| Index ETFs | Low (0.05% average expense ratio) | Large ($10 billion+ in assets) | Fast (intraday trading available) |
| Sector ETFs | Moderate (0.50% average expense ratio) | Medium ($100 million to $1 billion in assets) | Medium (intraday trading available, but less liquid than index ETFs) |
| Commodity ETFs | High (1.00% average expense ratio) | Small ($10 million to $100 million in assets) | Slow (trading may be limited due to commodity market constraints) |
| Bond ETFs | Low (0.20% average expense ratio) | Large ($1 billion+ in assets) | Medium (intraday trading available, but less liquid than stock ETFs) |
| Actively Managed ETFs | High (1.50% average expense ratio) | Small ($10 million to $100 million in assets) | Slow (trading may be limited due to active management) |
| Leveraged and Inverse ETFs | Very High (2.00% average expense ratio) | Small ($10 million to $100 million in assets) | Fast (intraday trading available, but high risk) |
How They Relate
The categories often overlap, with Index ETFs and Sector ETFs sharing similarities in terms of their passive investment approach, but differing in their scope and focus. Commodity ETFs and Bond ETFs can be used together to create a diversified portfolio, with commodities providing inflation protection and bonds offering fixed income. Actively Managed ETFs and Leveraged and Inverse ETFs are often used by more sophisticated investors, who are seeking to outperform the market or speculate on short-term market movements. However, these categories are commonly confused with each other, with investors mistakenly assuming that Actively Managed ETFs are similar to Leveraged and Inverse ETFs, when in fact they have distinct investment objectives and risk profiles. Specifically, the Fidelity Active Equity ETF and the ProShares UltraPro S&P 500 ETF are two examples of ETFs that are often confused with each other, but have different investment strategies and risk levels.