In a historic stock market rebound, Exchange-Traded Funds (ETFs), also known as index stock funds, ended the past year with record numbers. Following a net inflow of $164.43 billion in November, ETFs saw their first-ever monthly net inflow of $1.03 trillion, pushing total ETF assets to over $10 trillion.
Leading the charge are funds from well-known companies such as Vanguard, Blackrock, and Invesco. Here are some of the biggest winners:
– Vanguard Standard & Poor’s 500 (S&P 500) ETF
– iShares Core S&P 500 ETF
– Vanguard Total Stock Market ETF
– Invesco QQQ Trust
– iShares Core U.S. Aggregate Bond ETF
Is this a sudden surge? ETFs have been present in the United States since the 1990s. Known for their low costs, good liquidity, and instant diversification, ETFs have been a popular choice among investors.
Before you decide to invest, it is important to understand the different types of ETFs and their intricacies.
ETFs consist of a basket of different assets, such as stocks and bonds. You can purchase ETF shares through a brokerage account, similar to buying regular stocks. ETFs can invest in a wide variety of stocks, managed by professional teams from reputable financial institutions.
This means ETFs can save you time and effort in building a portfolio, as they eliminate the need to research and select individual stocks or bonds. This makes them very popular among novice investors.
Another attractive feature is their typically low costs. The average ETF expense ratio is around 0.42%, but you can find ETFs with fees as low as 0.04%. This means you would pay $4 annually for a $10,000 investment.
Just as costs may vary, ETF types also differ. Some ETFs invest in stocks, some in bonds, some in commodities like oil and gold, and others in cryptocurrencies such as Bitcoin. Each ETF has its own objectives and investment strategies.
Therefore, before you invest, let’s explore the various types of ETFs available.
Index ETFs, also known as passive ETFs, aim to track or replicate the performance of specific market indices, such as the S&P 500 index, which includes stocks of the largest American companies and is often seen as a representation of the overall stock market. Among the leading ETFs in 2024, two out of the four tracked the S&P 500 index. However, there are other broad indices like the Russell 2000 index, Nasdaq index, and Dow Jones Industrial Average.
Since index ETFs are passively managed and track the performance of existing indices, they generally have lower fees compared to actively managed funds.
Here are some of the largest index ETFs:
– SPDR Core S&P 500 ETF Trust
– iShares Core S&P 500 ETF
– Vanguard S&P 500 ETF
– Vanguard Total Stock Market ETF
– Invesco QQQ Trust Series I
Active ETFs, on the other hand, do not aim to track specific indices’ performance. Instead, their managers use different strategies and research to actively select securities within the fund to outperform market indices or provide higher returns. Consequently, active ETFs typically have higher fees than passive ETFs.
Here are some top actively managed ETFs:
– JPMorgan Equity Premium Income Fund
– Dimensional US Core Equity 2 ETF
– JPMorgan Ultra-Short Income ETF
– JPMorgan Nasdaq Equity Premium Income ETF
– Fidelity Total Bond ETF
Industry ETFs invest in stocks of companies within specific sectors like finance, energy, and technology. The performance of industry ETFs depends on the strength of the target industry or sector at any given time. Therefore, if you have confidence in the performance and potential of a specific industry, investing in an ETF tracking that industry could be beneficial.
Here are some sectors defined by the Global Industry Classification Standard (GICS):
– Communication services
– Consumer discretionary
– Consumer staples
– Energy
– Financials
– Healthcare
– Industrials
– Information technology
– Materials
– Real estate
– Utilities
Do remember that these ETFs may not offer the same diversification as index or active ETFs. Industry sectors are greatly influenced by various factors such as emerging technologies, governmental policies, geopolitical turmoil, and global economic conditions.
According to the ETF Database rankings, technology, finance, healthcare, energy, and real estate are the most popular sectors.
Commodity ETFs invest in commodities’ values such as gold, oil, and crops. Some ETFs invest in companies related to these commodities like gold mines, while others invest directly in physical commodities.
Commodity ETFs can have significant volatility. Many financial experts advise against investing more than 5-10% of your portfolio in commodities.
Here are some popular commodity ETFs:
– Franklin Responsibly Sourced Gold ETF
– Invesco Agriculture Commodity Strategy No K-1 ETF
– USCF Gold Strategy Plus Income Fund
– Simplify Commodities Strategy No K-1 ETF
– USCF SummerHaven Dynamic Commodity Strategy No K-1 Fund
These ETFs, formally known as spot Bitcoin ETFs, aim to track the price of Bitcoin. These ETFs hold Bitcoin as reserves. Buying shares of spot Bitcoin ETFs is different from directly investing in cryptocurrencies. You can purchase shares of spot Bitcoin ETFs through a regular brokerage account rather than a cryptocurrency exchange. This makes them particularly attractive to investors who may have been hesitant to buy individual cryptocurrencies in the past. In fact, the first batch of spot Bitcoin ETFs received approval from the U.S. Securities and Exchange Commission in 2024.
Here are some leading spot Bitcoin ETFs:
– iShares Bitcoin Trust (IBIT)
– Grayscale Bitcoin Trust (GBTC)
– Fidelity Wise Origin Bitcoin Fund (FBTC)
– ARK 21Shares Bitcoin ETF (ARKB)
– Bitwise Bitcoin ETF Trust (BITB)
Bond ETFs invest in various types of bonds, including those from companies, governments, and municipalities from different countries/regions. Here are some of the top-performing bond ETFs:
– Vanguard Total Bond Market ETF
– iShares Core U.S. Aggregate Bond ETF
– Vanguard Total International Bond ETF
– iShares 20+ Year Treasury Bond ETF
– Vanguard Intermediate-Term Corporate Bond ETF
If you are looking for a diversified and cost-effective way to invest, ETFs may be suitable for you. However, as you can see, ETFs come in various types, each operating differently. This can be an advantage, appealing to different types of investors and their preferences. There are ETFs for those looking to build portfolios tracking major stock indices, bond markets, physical commodities, cryptocurrencies, and more. Additionally, many robo-advisors use ETFs to construct portfolios, offering attractive options for investors who want a “set-it-and-forget-it” approach.
Like any investment, ETFs come with risks. You need to carefully research investment objectives, costs, liquidity, and market risks to find the ETF that suits you.