Exchange-traded funds or ETFs are a relatively new concept used in trade today. They are products that can be traded on the stock market but have to go through a brokerage firm in order to be sold. ETFs are usually not considered 100% as stock. They are rather a type of stock that also have properties of index funds.

 

Contents:

How Do ETFs Work?

Different Types of ETFs

Niche passive ETFs

Inverse ETFs

Bonds ETFs

Foreign Market ETFs

ETNs

Pros and Cons

Final Thoughts

 

How Do ETFs Work?

If you have a good understanding of how stock works, you will be easily able to grasp the idea behind ETFs. Let’s break down stock for a second. Stock is usually sold during operational times when the market is open for business. Each stock is described by important data such as its current price as well as a ticker symbol. ETFs also have the exact same features and are sold the same way stock is.

 

The similarities between ETFs and company stock end there. New stock can be created at any time during the trading day, a feature that ETFs bring to the table. An ETF also permits the fund owner to monitor the performance of their assets on the market. This enables them to make a better decision of when to sell them to potential customers.

 

Exchange-traded funds are tools primarily used by small-scale investors. However, their nature is also dictated by large-scale investors who do their part in monitoring how well EFTs are doing on the stock exchange. They do this by buying larger forms of EFTs known as creation blocks.

 

Here is a simplified breakdown of the function of EFTs:

1. EFT represents special stock that can be sold on the stock market. A provider makes a selection on said data and puts it up for sale.
2. The shares are then available for purchase (the same way company shares usually are).
3. The rest works identically to stock trading.

 

Different Types of ETFs

ETFs, take different forms. Although the concept is relatively new, there are a substantial number of them available today. Let’s look at a few examples:

Niche passive ETFs

These provide the right platform for small-scale investors to work on their trading strategies. This gives them an edge especially in a field dominated by large-scale investors. 

Inverse ETFs

Inverse EFTs are designed to work in situations where there is a decline in the average value of the stock. These ETFs enable providers to feel more secure in the stock especially that the risk involved is significantly reduced.

Bonds ETFs

These types of ETFs make it possible for anyone on the stock market to see all the different bonds that are available at a given time. It provides variety which comes in handy especially to investors looking to buy assets and providers who are offering them.

Foreign Market ETFs

As the name states, foreign market ETFs enable the monitoring of non-US assets. The most popular foreign markets are located in Asia i.e, Japan and Hong Kong.

ETNs

ETNs are debt securities. They are guided by benchmark strategies and a third party, namely a bank is always involved. Compared to other ETFs, these usually carry additional risks, especially if the third party is on the verge of bankruptcy.

 

Pros and Cons

Let’s compare the main advantages and disadvantages of ETFs. Finage provided the following table to get a better understanding on how it works:

 

Pros	Cons
The transaction can take place whenever, unlike traditional stock that has a fixed time of trade.	ETFs at their best work with investors who are willing to spend a significant amount of money.
Investors interested in ETFs have access to up-to-date descriptions of the data contained within them at any time.	Users may run into a few glitches when monitoring the data on the stock markets.
Investors typically don't have to worry about the amount of tax that could be taxed on ETFs, this makes them tax-efficient.	It usually takes about 48 hours before a transaction can be finalized. As a seller, you won’t have the chance to make another investment during this time.
ETFs allow investors to expand on what assets they have in their basket.	ETFs are a relatively new concept and some investors haven’t considered using them yet.

 

Final Thoughts

As technology continues to revolutionize how we trade stock, there is a chance that we will see more ETFs in the years to come. It is very important to understand that there are so many options out there and that each ETF has a unique feature that will enable investors to make better decisions.

 

It is very important to do a thorough search in order to find the ETF that is meant for you. You can get ETF data by using the Finage professional services. Get in touch with Finage and we will help you with all questions!