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Types of ETFs: Exploring ETF Market Trends

It is no secret that the Exchange-Traded Fund (ETF) market has rapidly expanded, offering access to a diverse range of financial sectors. You can learn more about how ETFs work in our article titled “Understanding ETFs: What Is an ETF.”

Consequently, there are various niche ETF types that traders may find noteworthy. Here are the main ones:

Exploring ETF Market Trends.

Types of ETFs and Their Characteristics

There are multiple types of ETFs and the main ones are as follows:

Stock ETFs

Stock ETFs follow a group of shares and allow their holders access to multiple types of companies. This type of ETF can range from Emerging Markets (EM) which invest in EM stocks to Small Cap ETFs which invest in smaller market capitalization shares, and healthcare ETFs which invest in healthcare shares. Other Stock ETF examples may include electric automobile stocks among others.

Index ETFs

Index ETFs invest in indices like the S&P 500, Nasdaq 100 (US-TECH 100), and the Vix Volatility Index. In other words, this type of ETF mimics the movements of the underlying index. This type of ETF is generally lower in volatility than other types and more affordable.

Sector ETFs

Sector ETFs, as the name suggests, invest in the investments that hail from a specific market sector. This, as a result, allows investors and traders to potentially benefit from a specific market’s movements without needing to trade or invest in individual stocks or assets.

Bond ETFs

Bond ETFs track and invest in bonds which are essentially a loan between two parties, usually the investor/borrower and the provider/issuer as bonds are tradable parts of a company’s debt.

Commodity ETFs

Commodities ETFs invest in commodities, which are raw materials or basic goods that can be extracted or harvested.

This type of ETF can invest in metals and agricultural commodities among other types of commodities.

You can learn more about commodity trading in our Trader’s Guide video on “How to Trade Commodities with Plus500.”

Currency ETFs

Currency ETFs track the trajectory of national currencies, hence providing their investors with exposure to the Forex market.

Factor ETFs

Factor ETFs track a market’s or an asset’s certain factors like value, quality, volatility, and more by looking at financial aspects such as earnings.

Sustainable ETFs

Sustainable ETFs invest in a group of companies that advance sustainability through adhering to Environmental Social Governance (ESG) guidelines. Read our “What Is ESG” article to find out more about ESG companies.

Alternative ETFs (Alt ETFs)

Alternative ETFs, or Alt ETFs, invest in strategies or assets that go beyond the scope of traditional stocks.

This encompasses the adoption of hedge fund strategies or their replication. Additionally, Alt ETFs invest across a spectrum of asset classes, including stocks, bonds, commodities, or real estate. These ETFs can also invest in risk management strategies and even collectibles and antiques.

Emerging Markets ETFs

This type of ETF invests in Emerging Markets (EM), which means it invests in the stocks of developing countries' markets.

What Characterizes Emerging Markets?

Emerging Markets are known for their volatility due to factors like geopolitical developments and low income per capita. Accordingly, Emerging Market ETFs can be risky due to the underlying economy’s instability. Additionally, this type of market is known for being less transparent than developed countries.

On the other hand, they are also recognized for their attractiveness to foreign investors and monetary policies aimed at boosting economic growth, thereby showcasing their potential. As such, Emerging Market ETFs can potentially yield high returns.

Examples of Emerging Countries

As of 2024, the countries listed as Emerging Markets include Argentina, Bangladesh, Brazil, Bulgaria, South Korea, Kuwait, Malaysia, Mauritius, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey, Ukraine, United Arab Emirates, India, Indonesia, Iran, Israel, Mexico, Morocco, Nigeria, Oman, Pakistan, Peru, Philippines, Poland, Qatar, Romania, Venezuela, and Vietnam.

The Pros and Cons of Emerging Market (EM) ETFs

Pros

  • EM ETFs can be used for portfolio diversification as they provide exposure to emerging countries and different types of markets.
  • EM ETFs are considered more liquid than other types of ETFs.
  • EM ETFs are usually considered less dependent on US markets, hence protecting investors from possible volatility in the US market.

Cons

  • EM ETFs are highly volatile due to the instability of Emerging Markets.
  • EM ETFs are prone to geopolitical, social, and governmental risks and are also susceptible to currency fluctuations.
  • EM ETFs may be accompanied by higher expense ratios.

How to Trade Emerging Market (EM) ETFs?

Trading EM ETFs can be conducted through ETF Contracts for Difference (CFDs) with companies like Plus500, which offer ETF CFDs on EM ETFs, including but not limited to iShares India 50 (INDY) and iShares China (FXI), and iShares Korea (EWY).

CFDs enable traders to access leveraged trading* and speculate on both rising and falling ETF prices, potentially resulting in profits or losses based on the difference between entry and exit prices.

ESG ETFs / Sustainable ETFs

Sustainable ETFs or ESG ETFs invest in the stocks of companies involved in maintaining sustainability, mainly through adherence to Environmental Social Governance (ESG) values.

What Does Environmental Social Governance (ESG) Mean?

ESG is a set of benchmarks used to standardize a company’s operations and behaviors. This includes environmental factors that assess how companies address climate issues and contribute to environmental conservation, how they treat their workers and fulfill their social responsibilities, and how they manage governance, including aspects such as payments, audits, shareholder rights, and leadership responsibilities.

Examples of ESG ETFs

  • Alternative Energy ETFs:
    Clean Energy, otherwise known as Alternative Energy, refers to energy generated from sources other than fossil fuels and free from greenhouse emissions, hence preserving the climate.

    Accordingly, Alternative Energy ETFs invest and track stocks of wind and solar companies like General Electric (GE) and NextEra Energy (NEE). Such ETFs include iShares Global Clean Energy ETF and Invesco Solar ETF.

Pros and Cons of ESG ETFs

Pros

  • Like other types of ETFs, ESG ETFs can be used for portfolio diversification as they offer exposure to a myriad of companies.
  • ESG ETFs may be interesting to those looking to invest in sustainable companies, hence potentially expanding sustainability efforts.
  • ESG ETFs come with lower fees and higher liquidity than other types of ETFs.

Cons

  • ESG ETFs come with the risk of greenwashing, which means that companies can present misinformation regarding their “green’ or sustainable practices.
  • ESG ETFs can be susceptible to interest changes such as interest rates, economic changes, and climate changes which make them volatile.

How to Trade ESG ETFs?

You can trade or invest in ESG ETFs through Plus500’s ESG ETF CFDs or through directly buying or selling the ETFs on stock exchanges.

Importance of ESG in the ETF Market

ESG plays a pivotal role in both the broader market and, specifically, the ETF market. This significance stems from the increasing number of companies embracing ESG values and integrating them into their operations. The surging interest in ESG further amplifies its impact, underscoring its growing importance across various sectors.

Multi-Asset ETFs

As the name suggests, Multi-Asset ETFs offer exposure to a diverse array of financial assets, spanning equities, bonds, and various asset classes such as the iShares High Growth ESG ETF.

Pros and Cons of Multi-Asset ETFs

Pros

  • Multi-asset ETFs can be used for hedging as risk can be spread across various assets.
  • Multi-asset ETFs can be used for portfolio diversification and exposure to multiple markets through one ETF.

Cons

  • Multi-asset ETFs can be risky and volatile due to their diversified nature.
  • Multi-asset ETF prices can be accompanied by higher transaction costs than other types of ETFs.

Traders interested in Multi-Asset ETF trading can open a buy or sell position on Multi-Asset ETF CFDs with Plus500.

Growth and Market Analysis: Future of ETFs

While the future is yet to be seen, the overall analysis suggests that the future of ETFs might be promising, with the US ETF industry projected to reach $7.3 trillion by September 2023. This reflects substantial expansion from $4.3 trillion pre-pandemic.

This growth is attributed to the increasing favorability of ETFs among investors and traders due to their cost-effectiveness, liquidity, and diversification. Furthermore, they are considered a form of “passive” investment, requiring minimal effort, which is also a rising trend.

FAQs

How have ETFs evolved in recent years?

Over the years, ETFs expanded into niche markets and provided access to a wider range of financial assets.

What is the future outlook for ETFs?

Overall, the futures outlook for ETFs is positive as investors and traders are expected to continue being interested in the cost-effectiveness, liquidity, and flexibility of ETFs.

What are thematic ETFs and why are they popular?

Thematic ETFs provide exposure to “themes” such as clean energy or tech. This type of ETF may attract those interested in gaining exposure to multiple sectors without investing in multiple ones.

What role do ETFs play in a modern portfolio?

ETFs provide an investment opportunity that includes diversification, liquidity, and cost-effectiveness.

*Leverage carries risks of capital loss.

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