Exchange Trade Funds

Exchange traded funds (ETF’s) are investment products have come into prominence during the past decade.  ETF’s are liquid market products that replicate the movement of a basket of assets or an individual asset such as an index, commodity, currency or market sector.  An ETF can hold assets such as stocks, commodities, currencies or bonds and are actively traded throughout a trading session like a stock.

Exchange Trade Funds

Trading ETF’s differ from mutual funds in that they provide intra-day liquidity and the ability to allow investors to exit at the current live price as opposed to an end of day price.  ETFs are considered attractive as investments because of their low costs, and stock-like features.

Sector ETF’s

ETF’s are broad based instruments and have allowed investors to focus on different sectors of the equity markets.  Generally, a sector ETF’s hold baskets of stocks that participate in similar businesses.  There are numerous ETF’s available for each of the major stocks sector categories.

A common classification breaks the market into 10 different sectors. Investors consider some of the sectors defensive and many of the sectors cyclical. Stocks sectors are helpful comparison tools, as they assist in the process of asset allocation and diversification.

Defensive stocks

Defensive stocks include utilities and consumer staples.  Utilities provide electricity and natural gas which are products that are needed by consumers despite current economic activity.

Cyclical stocks

Cyclical stocks fluctuated based on a variety of market conditions.  A list of cyclical sectors include:

• Consumer Discretionary – These types of stocks sell items that consumers purchase beyond items that would be considered necessary or staples.
• Energy – This sector focuses on stocks that produce, refine service and market energy products.
• Industrials – This sector focuses on companies that build and manufacture.
• Financials – This sector follow the major financial institutions along with regional banks.
• Information Technology – This sector focuses on large cap technology companies that focus on business activity as well as individual consumers.
• Materials – have experienced solid volatility, as European uncertainties continue to cap this equity sectors upside.
• Telecomm – This sector has been performing well and seems to be driven by the increasing global demand for mobile devices.
• Healthcare – Healthcare generates revenue from increasing population and regulations that favor the industry.

Currency and Commodity ETFs

There are ETF on specific assets such as currencies, commodities, and even volatility.  A currency ETF would hold spot currency pairs as well as futures on currency pairs to track the direction of a currency pair.  A commodity ETF such as a Gold ETF, would hold gold futures and gold spot transaction and track the direction of a gold benchmark.

Summary

Exchange Traded Funds are excellent investment vehicles to use to initiate risk in a specific sector as well as a robust way to generate a diversified portfolio using ETF to track specific assets.  An ETF is liquid and trades like a stock allowing you to enter and exit intra-day. Sector ETF’s allow investors to have exposure across a broad range of businesses, and allow traders to hedge exposure to individual stocks.