Stock ETFs
Stocks also known as Equities are a financial security instrument that represents the ownership of a fraction of a corporation. This means that money is invested into a company in exchange for a portion of ownership interest. This gives the owner of the stock (named the shareholder or stockholder) the right to a portion of the company’s assets and profits. Units of Equity or Stock are named shares. An amount invested in capital to a company does not have to be paid back, in comparison to a fixed income instrument.
Equities can be issued by companies around the world to collect from investors and finance their operations. This means an investor in Ohio can invest in a German car company just as easily as they can invest in an American technology company.
Equity ETFs invest in a group of publicly traded stocks. ETFs can be US only or contain international stocks. Investors in Equity ETFs obtain profits through the increase in value of the ETFs or via dividends. Equity ETFs are categorized according to company size, the investment style of the holdings, geography and sector. Most are passively managed, but some are actively managed.
The advantage of Stock ETFs is that they offer diversification and exposure to an entire sector of the market without the risk of investing in a single company, whose prices can deteriorate with one bad press release or earning report. The Stock ETFs trade intraday like stocks and close to the value of the underlying securities.
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Real Estate (REITs)
REITs stands for Real Estate Investment Trust. A REIT is a publicly traded investment vehicle that has the objective of allowing multiple investors to collect their money into a common pool; for use in investing in various types of real estate or real estate loans. REITs offer shares to their investors, and they have a proportional interest in the income that the REIT distributes and the assets that it owns
REITs must invest the preponderance of their assets in real estate, and at least 75% of their income has to come from real estate related resources. REITs must have at least 100 different investors, with no five investors having more than a 50% investment in the REIT. REITs offer a higher dividend yield in comparison to other instruments, as they must pay 90% of their taxable income to their shareholders in the form of distributions.
There are several types of REITs, and they tend to fall into a few different categories. For example, Equity REITs own actual real property. Mortgage REITs invest in securities that are related to mortgage financing of real estate, including mortgage-backed securities, mortgage loans and similar derivative investments. REITs can also be classified depending on the types of properties they own. Some of the categories include residential, retail, healthcare, self-storage, industrial, office, hotel, data center, and timber REITs.
REIT ETFs offer exposure to investment in Real Estate Investment Trusts. REIT ETFs invest in the broad market of REITs or let investors obtain exposure to a specific type of REIT. For example, Mortgage REITs ETFs are made up of real estate companies that invest in mortgage-backed securities.
The advantage of REIT ETFs is a way for shareholders to engage with this sector without needing to attend to its complexities. Another benefit of using a REIT ETF is the ability to invest in an array of different REITs through a single diversified investment. If you want to invest in real estate but can’t afford to invest in properties directly or build a diverse portfolio of REITs, a REIT ETF may be the way to get there while building sustained income and wealth.
Blockchain ETFs
A blockchain is a peer-to-peer shared and distributed ledger that aids the process of registering transactions and keeping track of assets in a network. The blockchain records transaction information in “blocks” that are linked together through a “chain.” As the number of transactions increases, so does the blockchain.
A blockchain collects information in blocks. The blocks hold groups of information. Blocks have a set capacity of storage, and when that storage capacity is filled, they are chained onto the previously filled block, forming a chain of blocks which is defined as the “blockchain.” When information is added past the set capacity, a new block is added to the chain.
While it is common to associate Blockchain with cryptocurrencies, Blockchain has been increasingly used in banking, investing, supply chain management, and other industrial sectors. The incorruptible nature of Blockchain makes it an increasingly attractive option for major industries. An example of this can be seen in supply chain technology and banking, where block chain is used to keep track of complex ledgers.
Blockchain technology is the underlying technology that enables cryptocurrencies such as Bitcoin, Cardano and Ethereum to exist.
Blockchain ETFs invest in a basket of companies that use blockchain technology for operations, such as big blue-chip technology firms, supply-chain management systems, digital lending platforms, digital identity systems, digital payment systems and cryptocurrency miners.
The advantage of Blockchain ETFs is that they include companies in their investment strategies that are involved with the innovation of business applications through the development and usage of blockchain technology. Some Blockchain ETFs, like ARKW, have direct exposure to cryptocurrency through its purchase of the Grayscale Bitcoin Trust. ARKW also holds non-Cryptocurrency technology companies that use Blockchain, like Square and Tesla.
At the end of the day, investors need to ask themselves, would you rather own the volatile coin or the technology that allows it to exist?
SRI/ESG ETFs
ESG investing refers to investing in companies that exhibit favorable characteristics related to Environmental, Social, and Governance issues (ESG Issues). Other terms that can be interchangeable include Socially Responsible Investing (SRI), Sustainable Investing, and Impact Investing.
In this type of investment strategy, companies are assessed according to different criteria, and are ranked, allocated and included in the portfolio based on a scoring system. The more ethically they operate in terms of energy usage, conservation, natural resources, waste production, pollution disposal, business ethics, carbon emissions, human rights, health, safety, labor practices, diversity, corruption, transparency and disclosure, the more highly they are ranked.
Investors use six methods for bringing ESG considerations into their decision making: exclusionary screening, best-in-class selection, thematic investing, active ownership, impact investing, and ESG integration. These strategies are not mutually exclusive and can be used in combination with each other.
SRI/ESG ETFs are investments that track an entire market—such as U.S. large-cap stocks, or Canadian government bonds—but they exclude certain industries or companies that don’t comply with ESG criteria. Examples of excluded industries include oil and gas, weapons, and tobacco. They also limit holdings to companies or governments with the highest ESG scores.
Not all SRI/ ESG ETFs operate following the same principles. Some look to integrate ESG considerations into their investment strategy while still maintaining a diverse portfolio covering a range of industries, while others are focused on impact or thematic investing strategies. Thematic or impact ESG’s focus on a specific sector or theme. Examples of thematic/impact ESG’s include Clean Energy and Gender Diversity ESGs. ESG Strategies apply to both Fixed Income and Equity ETFs.
The advantage of SRI/ ESG ETFs is that they allow people to align their values with their investment choices. This incentivizes companies to promote standards that create a technological, sustainable, equitable planet focused on innovations which will lead mankind in to the Aquarian Age of the 21st Century.
Gold ETFs
Gold is a chemical element that constitutes a rare commodity. It is a precious metal that has been used for coinage, jewelry, and arts throughout history. In the past, it served as the basis for U.S. monetary policy via the Bretton Woods System, until 1971 when the gold standard was abandoned for a fiat currency system. The World Gold Council estimates that all the gold ever mined totaled 190,040 metric tons in 2019.
Gold ETFs are financial vehicles traded on an exchange. They provide exposure to gold by tracking the price changes of gold. Investors can obtain profits with the increase in gold without actually owning the asset. Investors can use gold when uncertainty and volatility rise up in the equities market.
There are two types of gold ETFs available to investors; physical and synthetic. Physical Gold ETFs invest to hold a certain amount of gold bullion in a vault, while synthetics use derivatives to obtain an exposure to the price changes of gold.
The advantage of Gold ETFs in a portfolio is that unlike with Bonds, its correlation to Stocks is zero to negative. This means that when stocks go down, bonds also go down–but Gold will either hold its value or appreciate in value. Gold ETFs are also highly liquid, unlike physical gold. For these reasons, Gold ETFs are a great diversifier for anyone’s portfolio.
Commodities
There are several types of commodities. They can be classified by sectors, like energy (natural gas, crude oil), metals (copper, silver and industrials like zinc), and agricultural products (wheat, cocoa, cotton). Commodities are being bought and sold 24 hours a day every day of the week. The commodities markets are extremely volatile and notoriously difficult to trade in.
Commodity ETFs are investment vehicles traded on an exchange, intraday, that are focused on exposures to these various commodities. They track a single commodity or a basket of commodities holding the actual physical assets (Physical Commodity ETFs) or using derivatives (Derivatives Based ETFs). Commodities in these ETFs may include precious metals, livestock, oil, coffee and sugar. An Investor that purchases these commodity ETFs doesn’t own the physical asset, instead they own a set of contracts backed by the commodity.
The advantage of Commodity ETFs is that they provide a way to get exposure to the commodity markets in a risk-tolerable and cost effective manner without actually having to hold the underlying commodity that can be extremely volatile. Commodity ETFs can also act as a hedge against inflation and help to provide balance and diversification. Commodities tend to have a low to negative correlation with the stock market, as they tend to perform better when the equity market is down.
Bonds
Bonds, also called Fixed Income securities, are loans from investors to an institution or municipality that requires capital inflows. The borrowers are named issuers, and investors or bond holders are the lenders. The fixed income market is composed of many types of securities. Investors are expected to be repaid through a regularly paid interest amount which is called a coupon.
They include, but are not limited to: Treasury issues, government agency issues, mortgages, corporate bonds, municipal bonds, asset-backed securities, and inflation protected securities (TIPS). Fixed income securities are generally categorized by type (e.g. corporate or government, geographical location), maturity (e.g. short vs long-term), and credit (e.g. high yield or investment grade).
Bond ETFs are portfolios that trade on an exchange to gain exposure to segments of the Fixed Income Markets including High Yield, Credit, Municipals, U.S. Treasuries, Mortgages and Emerging Markets Debt. Fixed Income ETFs allow investors to access bond portfolios on an institutional level.
The advantage of Bond ETFs is that they allow ordinary investors to gain passive exposure to benchmark bond indices in an inexpensive way. They provide investors with the opportunity to gain exposure to the bond market with the ease and transparency of stock trading. As such, Bond ETFs are also more liquid than individual bonds and mutual funds (which trade at one price per day after the market closes). Even during times of instability, investors can trade a bond ETF even if the underlying bond market is not functioning well.