Types of ETFs::Index ETFs::Commodity ETFs::Currency ETFs - Exchange Traded Funds

So are you asking the obvious question: What are exchange traded funds? If so you are in a fraternity (or sorority, ladies) that is shrinking rapidly. ETFs have exploding growth, topping 1,000 total funds earlier this year. Actually there were less than 100 as recently as 2003, but over the last four years the growth in the number of exchange traded funds has been 400%.

Exchange traded funds have some similarities to stocks in that they will be traded through stock exchanges. They will mostly try to stay in line with some kind of stock market index like the S&P 500.

By and large you find the majority of exchange traded funds are in the class of funds that are called index funds. What this means is that they will hold a collection funds as they try to mimic a specific stock market index. Of course this is only good when the index chosen to mirror has a good run. Mirrors reflect good and bad, so ETFs are subject to the same factors that would affect any stock index including economic news such as employment figures, consumer confidence, inflation, housing data and world events that influence foreign markets as well as their stock indices.

These index funds will fall into the following groupings: A representation fund will get as close as possible to the smattering of funds in the particular index of interest, hoping to duplicate exactly the performance. The next level will drop back to only hold as few as three quarters of the same funds in a particular index fund, seeking to weave in a bit of diversification in hoped of mitigating the kind of dips that harm the overall performance of the fund.

These types of exchange traded funds will include heavy amounts of commodities. What is a commodity, you ask? It is something like crude oil, heating oil, natural gas, in the fuels market. Agricultural commodities include wheat, coffee, cotton, corn, lumber, soybeans and others. Precious metals like gold, silver platinum and copper also are in this class of investments.

Two of the best performing exchange traded funds at this time are the ones with wheat as their primary focus and gold exchange-traded funds. Wheat prices for 2010 are up 31%, based in large part on global weather disasters that have harmed wheat crops and guaranteed strong demand and lucrative prices for wheat grown in the United States. Gold is continuing its strong price growth again this year, making the gold exchange traded funds a solid bet.

Like the index ETFs the exchange-traded commodities will have a commodity index as their blueprint for how they divide their money for investment purposes. Both the ETC and ETF are desired for their liquidity in allowing for adjustment based on information relating to the respective commodity or group of stocks tracked by the index.

Many investors will pepper their portfolios with bonds to try to lessen the overall volatility and risk of their investment portfolio. That is a similar goal of the bond exchange traded funds. It is a good avenue for investors if they seek another avenue for broadening the scope of their investment strategy.

Bonds and bond ETFs are good to have in economic downtimes as this is the time when bonds are most effective. They will not deliver the bang that stocks can during an economic boom cycle, but will create a type of haven for your money when things go sour as they have for the last couple of years.

Currency ETFs or ETCs are targeted to a specific currency such as the Russian ruble, the Hong Kong Dollar, Japanese Yen or Mexican Peso. The advantage of these is that they give individual investors another entry point without having to be an expert on all the associated exchange issues. Different countries have growth cycles independent of stock markets, so the currency ETF can provide another chance to make money in the stock market.

Currency ETF funds will benefit from a weak United States dollar. The can also hitch a ride on a booming commodities market, two things which have been common themes in the economic downturn of the last two years.

ETFs are another way to get money into the stock market without carrying such substantial risk. This is not to say all the risk is removed, but it certainly is less concentrated as the ETF has quite a diverse portfolio like the regular and well known stock mutual funds. These funds can only be bought and sold by large entities such as an investment fund manager, so you must go through a stock broker for this type of stock trading.