, the investment risks involved vary dramatically from fund to fund. ETF strategies continue to multiply, but there are three basic types of ETFs that investors should be able to identify: domestically-traded equity ETFs, international equity ETFs and futures/swap based ETFs,” Don Dion From The Street Reports.
Don Dion goes on to rate and explain the 3 types below:
Domestically-Traded Equity Based ETFs -These ETFs get a complexity rating of beginner. These ETFs, which trade on U.S. markets and track stocks that also trade on U.S. markets, are the most elemental of the group. These funds tend to closely track their underlying basket of stocks and trade close to net asset value (NAV). This group has lower risk because investments are easily hedgeable. A wide range of strategies are available with this type of fund, including commodity and international.
International Equity ETFs-These ETFs get a complexity rating of intermediate to sophisticated. This group of funds tracks securities that are not listed on U.S. exchanges. While the ETF has trading hours of 9:30 a.m. EDT to 4 p.m. EDT, the stocks in the underlying basket may keep totally different hours on exchanges that are half a world away. Since it is often impossible to immediately hedge your investments in these funds, these ETFs may stray from NAV.
Futures/Swaps ETFs-These ETFs have a complexity rating of sophisticated. These ETFs are comprised of baskets of futures contracts and swaps. The investment objective of these funds is for the NAV of the ETF to reflect the changes in percentage terms of the spot price of the futures and the price of swaps that make up the basket. The futures and swaps markets are complex and involve speculation.
“These three categories of ETFs are not the only types available, but they are particularly important ones for investors to understand right now. As the ranks of fixed income, actively managed and target date ETFs grow, it will be equally important for investors to understand the particular ways in which these funds differ as well,” Dion Reports.
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