Since being developed in the 1990s, exchange-traded funds (ETFs) have become increasingly popular as an investment vehicle for both retail and institutional investors because they offer a low cost, diverse and transparent way to get exposure to a single theme or industry.
The first ETF ever listed in the U.S. came in 1993: SPDR S&P 500 (SPY). The SPY tracks the Standard & Poor’s (S&P) 500 Index, which is comprised of the 500 large-cap U.S. stocks, and to this day, the SPY is possibly the most well-known ETF globally.
In 2021, there were 8,552 ETFs globally, up from 276 in 2003, according to Statista. And global exchange-traded funds received a record $1.22 trillion in inflows last year, which was about 71% higher than the previous year, Reuters found, citing Refinitiv Lipper data. This brought total global assets invested in ETFs close to $9.5 trillion
It’s clear that ETFs are incredibly popular, and if you are thinking about investing in them, but don't know too much about them, we’ll answer three questions: What is an ETF? What are the different types of ETFs? And how do you buy ETFs?
Exchange-traded funds (ETFs) are one of the most successful financial innovations of the last 30 years.Phil Mackintosh, Chief Economist at Nasdaq
What is an ETF?
An ETF combines aspects of mutual funds and stocks. Like a mutual fund, an ETF is a fund that offers investors access to a portfolio that’s been assembled by a professional. Like a mutual fund, an ETF is a collection of securities (like stocks or bonds); but unlike a mutual fund, an ETF can be traded on a stock exchange throughout the day like a stock. An ETF also has a ticker symbol, and its price data can be obtained during the trading day.
The value of your ETF will depend on how the collective group of assets is performing. For example, if you bought QQQ, the ETF that tracks the Nasdaq-100 Index, and the Nasdaq-100 goes up for the day, so will QQQ.
What are the different types of ETFs?
There are many types of ETFs. There is one for every kind of asset, sector or investing style out there, and ETFs can be super wide or super narrow in focus. Some common ETFs include:
- Equity ETF: This pools in common stocks or equities (as opposed to bonds).
- Bond ETF: This invests in fixed-income securities such as corporate bonds or Treasuries.
- Commodity ETF: This tracks physical commodities like precious metals, natural resources and agricultural goods.
- Currency ETF: This tracks a single currency or a basket of currencies.
- ESG ETF: This allows investors to track and allocate capital towards more sustainable companies.
- Industry or Sector ETF: This type focuses on a specific industry such as energy, real estate, technology or healthcare.
How do I buy an ETF?
Investors can purchase and sell shares in an ETF through a brokerage account like Robinhood (HOOD).
Before buying shares in an ETF, you'll need to figure out what kind of ETF you want to invest in. For example, if you believe biotech is a smart industry to invest in, but don’t know which biotech companies to invest in, there are several biotech-themed ETFs you can buy. This way you will have a range of investments in the fintech sector and have a more diverse portfolio.
Once you figure out which type of ETF you want to invest in, do a quick Google search to find out what the ticker symbol is and what distinguishes it from other ETFs. Even if there are multiple ETFs covering the same concept, there are some key differences to keep note of, such as the expense ratio, the way the ETF is handled (is it actively managed or automatic?), how it comes up with the specific securities it is holding, and so on.
For example, the two biggest biotech ETFs are the iShares Biotechnology ETF (IBB) and SPDR S&P Biotech ETF (XBI); what makes them different? IBB tracks the ICE Biotechnology Index, while XBI tracks the S&P Biotechnology Index; the former tracks over 350 stocks in its fund, and the latter tracks a little under 150 stocks. IBB has an expense ratio of 0.45% and XBI's is 0.35%. You can compare their charts to see which has performed better, or look at how the ETF is built to decide which is more appealing to you.
Once you've chosen an ETF, all you need to do is place an order for ETF shares like you would with a traditional stock. You will then receive the market price on the exchange at the time your order is placed, and like a stock, you can monitor how the price is doing during the trading day and decide when to buy more or sell your current shares.
For a deeper dive into ETFs and how they perform, check out our Chief Economist Phil Mackintosh’s guide to ETFs here. And find market data for ETFs here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
