Exchange Traded Funds (ETFs) can invest in different types of financial instruments like stocks, bonds and commodities. All these types are explained here
Index ETFs: Index ETFs invest in the equity shares in order to replicate performance of any stock index. ETFs replicate the performance of a stock index by holding the portfolio of same companies with the same percentage as the index is made. An ETF replicating the Indian Nifty Index invests in all the 50 companies that the nifty has in the same percentage weight. For any kind of bonus issue or index modification, the portfolio is also modified to replicate the same changes.
Commodity ETFs: Commodity ETFs invest in the commodities to replicate their price movements. The commodities involved here are precious metals and futures which are considered to be an investment to the investors. Commodity ETFs are just like normal shares which are traded on the stock exchange and enable the investors to invest in the commodities without physically holding them. Gold ETF has become very popular inIndiaafter its launch.
Bond ETFs: Bond ETFs invest in the bonds or portfolio of bonds to replicate any popular bond index. It enables the investors to invest in different types of corporate and government bonds which is not possible to do otherwise. Bond investment increases during economic slowdown and recession, as most of the investors pull money from stock market (due to poor performance) to invest in the government bonds which are considered to be almost risk free. So the increase in bond investment can be considered as an indicator of economic slowdown or recession.
Currency ETFs: Currency ETFs invest in the foreign currency and the currency future to replicate the currency exchange rate movement. It is used by the investors who want to hedge themselves from any kind future currency movements. The Euro ETF was the first currency ETF launched in the world followed by lots of currency ETFs. Now the FS ETFs have become very popular among the multinational corporations to hedge themselves from any kind of future exchange rate changes.
These are the widely used Exchange Traded Funds (ETFs) which are used by different types of investors.