Different Types of ETFs For Your PortfolioMarch 7, 2019
Exchange traded funds come in different kinds and each of these kinds offers a different set of benefits fit for different types of LBLV Online Trading investors. Below are the main types of ETFs from which you can choose depending on your investment goals and needs.
Most ETFs follow equity indexes or sectors. Some index ETFs completely imitates an index, while others use a representative sampling, which deviates slightly by using options, futures, and swap contracts, as well as the purchase of the stocks that are sometimes not found in index.
If the sampling becomes too aggressive, it can result to tracking errors. An ETF with a tracking error that’s higher than 2 percent is considered actively managed. As ETFs become more and more specialized, this is something that investors should watch out for.
The proliferation of ETFs offers LBLV Live Trading Signals investors with an inexpensive way to achieve diversification in their portfolios. Others invest in companies with different sizes. There are funds available in almost any area, and there are also funds that use different investing styles such as value and growth investing.
It is a well-known advice that you should allocate a portion of your portfolio in fixed-income assets like bonds and bond ETFs. Bonds usually decrease a portfolio’s volatility, while also providing an additional stream of income.
Just like equity funds, there are a lot of bond funds out there. Investors who are not sure where to invest should consider the total bond-market ETF that invests in the whole US bond market.
Before investing in commodity ETFs it’s important to understand why you are interested in commodities in the first place. Commodities have had very little correlation to equities, with experts suggesting that strategic asset allocation accounts for 90 percent of a portfolio’s return.
On the other hand, it’s not enough to have stocks, bonds, cash, commodities, and real estate in your investment portfolio. You should also try to diversify within each of those assets. ETFs are great help in terms of this goal.
Investors can purchase a commodity ETF that follows the price changes of particular commodities like gold or oil, or in a commodity stock ETF that invest in the common shares of commodity producers.
As the world’s currencies become more and more volatile and the US dollar’s role as a reserve currency slowly fades, investors who want to maintain the value of their dollar-denominated investments will try to find options that can provide a hedge against the depreciating dollar.
One good way is to invest in foreign currency ETFs. It can be a single currency or one with a broader focus and the goal is to safeguard your portfolio from a slumping dollar. Meanwhile, if the dollar appreciates, you can protect your holdings by shorting the same ETF.
Real Estate Funds
You may also want to consider real estate investment trusts (REIT) ETFs. You can invest in a fund that specializes in a single real estate type or you can invest in one with a broader focus. But the main appeal of these funds is that they have to pay out 90 percent of their taxable income to shareholders.
This is great for investors in terms of yield in spite of the increased volatility compared to bonds. These funds are great too as source of income, particular when short-term interest rates and inflation are low.