What Is Exchange Traded Fund – ETF?
April 4, 2012 Leave a comment
ETF is a type of security that tracks the movement of index, prices of commodity, currency, bonds and many other available assets. It is being traded like a stock in the exchange where investors are able to perform buying and selling of ETF.
Why Trade ETF?
Index & Sector Investing
ETF provides investors a variety of investment opportunities, instead of getting a single return by investing in one company; investors get the chance to receive the return of a group of companies. This reduces the risk of investing in one single company which gives negative return.
Imagine if you decide to invest in Company A in the banking sector, which turns out to give a negative return of 20% due to whatever reasons (scandal, lawsuit, bad earnings). However, by investing in ETF which tracks the movement of a group of banks, the positive return of other banks will offset the negative return of Company A.
Example below:
| Company | Return |
| A | -20% |
| B | +10% |
| C | +18 |
| D | +15 |
| E | +17 |
| Scenario | Company A | ETF (A,B,C,D,E,F) |
| Investment Amount | $10,000 | $10,000 |
| Return | -20% | (-20+10+18+15+17)/5 –> 8% |
| Value | $8,000 | $10,800 |
The downside? Well investor could miss out the higher return of companies which are performing very well. The question is, how good are you in picking the right company?
Below are some of the popular ETFs based on Index & different sector listed on NYSE ARCA Exchange. More information can be found on https://www.spdrs.com/
| Ticker Symbol | Type |
| SPY | S&P 500 Index |
| DIA | Dow Jones Industrial Average Index |
| XHB | Homebuilders |
| XLY | Consumer Discretionary |
| XLP | Consumer Staples |
| XLE | Energy |
| XLF | Financials |
| XLV | Health Care |
| XLB | Materials |
| XLK | Info Tech |
| XLU | Utilities |
| XRT | Retail |
| XOP | Oil & Gas Exploration & Production |
| XES | Oil & Gas Equipment & Services |
| KIE | Insurance |
| KME | Mortgage Finance |
| KBE | Banks |
| KRE | Regional Banks |
| XHS | Health Care |
| XHE | Health Care Equipment |
| XBI | Biotech Select |
| XPH | Pharmaceuticals |
| XTN | Transportation |
| XAR | Aerospace & Defense |
| XLI | Industrial |
| XME | Metals & Mining |
| XSW | Software & Services |
| XSD | Semiconductor Select |
| XTL | Telecom |
