Author: RockFlow

Key Points

① ETF is a special form of fund. It can track any target, such as the market index, industry index, the price of a certain commodity, etc., and can even track a specific investment strategy.

② With the help of ETFs, ordinary investors can invest in multiple assets with one click, with low transaction costs and good liquidity.

③ There are four important categories of ETFs: industry ETFs, inverse ETFs, leveraged ETFs and stock index ETFs. Industry ETFs invest in a specific industry; inverse ETFs move in the opposite direction to the underlying (if the underlying falls, the ETF rises, and if the underlying rises, the ETF falls); leveraged ETFs can produce a multiple effect, if the underlying rises or falls by one time, the ETF will fluctuate multiple times; stock index ETFs track a certain stock index.

The crash of the U.S. stock market in 1987 brought profound lessons to investors, but it also gave birth to a financial innovation of extraordinary significance to future generations - ETF.

On October 19 of that year, the Dow Jones Index plummeted 22.6%, the largest single-day drop in history. The government quickly increased trading control measures, but did not solve the liquidity problem.Xiaobai NavigationThe market urgently needs a simple, reliable and effective mechanism to hedge the risk of stock portfolios, and the idea of "a basket of stocks" was born.

After several years of exploration, in 1993, the U.S. stockexchangeLaunched the first ETF that truly tracks the S&P 500 Index—SPDR. To date, SPDR remains the world's largest and most popular ETF product.

In the following 30 years, the types of ETFs have been greatly enriched. The US stock market has successively launched cross-border, industry, commodity, leveraged, inverse, actively managed, and rotational FOFs. As of mid-2023, the global ETF asset management scale has reached a huge US$10 trillion (of which US stock ETFs contribute nearly 70%).

Why are ETFs suitable for ordinary investors? What exactly are they? How to choose the category that suits you? The RockFlow investment research team will answer them for you one by one in the following articles.

1. What is ETF?

ETF stands for Exchange Traded Funds.exchangeExchange traded funds. They provide investors with a relatively cheap way to invest in a large number of assets and indices.

It can be understood like this: the issuing institution buys all the stocks tracked by a certain index, combines them together to form a new fund, and then sells them in small pieces, which become a typical ETF. When you buy this ETF, it is equivalent to buying all the stocks in this index.

The advantage of ETFs is that ordinary investors can invest in multiple assets with one click, with low transaction costs and high liquidity.

Therefore, it has developed rapidly in North America, and there are many types: some track the market index, some track the industry index, and some track the stock market index of other countries... There are also different types that track bonds, gold, oil, foreign exchange, and agricultural product prices. The structure of ETF can track any target, from the price of a single commodity to a large and diversified collection of securities, and even a specific investment strategy.

现在，越来越多的投资者开始交易 ETF。据统计，美国三大证券exchange每天交易量的一半以上是 ETF 交易。

In addition, ETFs are particularly suitable for medium- and long-term investors because they value the "big picture" the most, do not have the energy to study the performance of various companies, and do not want to see their investment portfolios fluctuate greatly due to unexpected events (this phenomenon often occurs when holding individual stocks). Such investors can choose a few ETFs with good liquidity, buy them when the price is right, and sell them after the trend reverses. The number of transactions per year is small, the risk is relatively low, and they can sleep well.

2.The many types of ETFs

Investors can choose from various types of ETFs, including passive & active ETFs, bond & stock & commodity & currency ETFs, forward & inverse ETFs, etc. according to different classification methods.

Passive ETFs are those that replicate the performance of a security index (such as the S&P 500, NASDAQ, etc.) to achieve a rate of return that is basically the same as that of the index, or a more specific target industry; actively managed ETFs are managed by fund companies, which is equivalent to giving money to fund managers to trade stocks on your behalf. For example, the ARK lnnovation ETF managed by Cathie Wood, the female version of Buffett, canmake moneyDepends on the quality of the fund manager. It has slightly higher fees than passive ETFs, but the coverage and potential return ceiling are much higher.

In terms of underlying asset classification, stock ETFs are the most common, with many sub-categories; currency ETFs mainly track the trend of currency exchange rates; bond ETFs are mainly in the bond market, and the returns depend on the performance of the underlying bonds. The returns are relatively stable, and the upper limit of returns is lower than other ETFs; and commodity ETFs include oil, gold, silver and other related ETFs.

Classified by direction, positive ETFs, such as the S&P 500 ETF (SPY), track the rise and fall of the S&P 500 index. In theory, if the index rises by 1%, the ETF will also rise by 1%. Inverse ETFs, such as shorting the S&P 500 (SH), also track the S&P 500 index, but the rise and fall are in the opposite direction. In theory, if the S&P 500 index rises by 1%, this ETF will fall by 1%, and if the S&P 500 index falls by 1%, this ETF will rise by 1%.

Below we take a detailed look at the four types of ETFs that are most popular with investors - industry ETFs, inverse ETFs, leveraged ETFs and stock index ETFs.

2.1)Industry ETFs

Industry ETFs are ETFs that invest in a specific industry. If you are optimistic about a certain industry, you can choose to invest in an ETF that tracks that industry, eliminating the need to select stocks and gaining the overall returns of that industry.

The industries that have been popular (or are currently popular) in recent years include consumption, Internet,AI Etc. If you have a deep understanding of one of these industries, you can gain insight into the industry’s rise and fall cycle and choose to bet heavily on it.

Obviously, industry ETFs are more suitable for investors with strong independent analytical capabilities. Its advantage is that if the right choice is made, it is possible to achieve returns higher than the market average; but the disadvantage is also obvious. Since it is betting on a specific industry, once it enters at a high level or encounters a downturn in the industry, it will be a waste of time and sunk costs.

The current 10 major industries of US stocks include optional consumption, essential consumption, energy, finance, medical care, industry, raw materials, technology, public utilities, and real estate, and their tracking targets are all Dow Jones and S&P index components. The "Industry Selected ETFs" newly launched by the RockFlow investment research team have selected high-quality industry ETFs that combine high liquidity and representativeness (for the overall reading experience, the following figure only shows part of it):

2.2)Inverse ETFs

We all know that although the long-term trend of major U.S. stock indices is upward, they may also encounter short-term violent adjustments or longer-term stagflation. If a bear market occurs, investors are not limited to volatility and floating losses, but can actively respond and even profit from it. One of the most commonly used tools is the inverse exchange-traded fund, or inverse ETF.

It is also called short ETF, which uses derivativescontractETFs that profit when the underlying asset or market index falls. They are mortal enemies of the underlying asset. They rise as much as the underlying asset falls, and vice versa. Compared with short selling or buying put options, the biggest advantage of inverse ETFs is that they are simple and easy to operate, so they are more popular with some investors.

It should be noted that inverse ETFs refer to the daily rise and fall of the relevant index, rather than the cumulative rise and fall over a period of time. Therefore, they are only suitable for intraday operations and not for long-term holding, otherwise it will lead to unnecessary losses.

The "Air Force Vanguard ETF" stock list recently launched by the RockFlow investment research team has helped everyone select highly liquid inverse ETFs for major US stock indexes as well as financial, real estate, and Chinese stock indexes (for the overall reading experience, the following figure only shows part of it):

2.3)Leveraged ETFs

Many investors are keen on individual stock trading and do not like ETFs, thinking that ETFs do not have high returns and are not exciting enough. In fact, leveraged ETFs with double and triple returns are also popular in the US stock market, which can fully meet investors' needs for (relatively) low risk and high returns. It is also called a multiple ETF, which achieves the effect of tracking index multiples by holding a basket of underlying derivatives, like a magnifying glass, which will amplify returns and risks.

Compared with aggressive leverage tools such as stock index futures and margin trading, the advantage of leveraged ETFs is that they have a lower entry threshold, both in terms of capital threshold and professional requirements. It has no position restrictions, no margin is required, and the operating risk is lower. For investors who pursue leveraged investment, it is more efficient and convenient.

The RockFlow investment research team has recently aggregated a number of high-liquidity leveraged ETFs of important US stock indexes and popular industries (semiconductors, etc.) to form a high-quality "leveraged artifact ETF" stock list for interested investors to refer to. With the help of these leveraged ETFs, you can also leverage high returns with relatively small funds (for the overall reading experience, the following figure only shows part of it):

2.4)Stock Index ETFs

Stock index ETFs are ETFs that track a stock index. Taking the US stock market as an example, the four major indexes are the Dow Jones Industrial Average, the Nasdaq 100 Index, the S&P 500, and the Russell 2000. The four indexes track the overall market, technology stocks, large-cap stocks, and small and medium-sized enterprises, respectively.

How is this done specifically?

• The Dow Jones Index is one of the oldest indices in the U.S. stock market. It includes 30 of the largest and most well-known public companies in the United States;

• The 100 constituent stocks of the Nasdaq 100 are representatives of U.S. technology stocks, and generally have high growth potential;

• The S&P 500 is an overall measure of the top 500 US public companies, used to show the rise and fall of the US economy;

• The Russell 2000 Index is composed of the 2,000 stocks with the smallest market capitalization in the Russell 3000 Index, and can be regarded as a barometer of small and medium-sized enterprises.

The latest stock list launched by RockFlow's investment research team - US Stock Index ETF, includes high-liquidity ETFs that currently track the four major indices of the US stock market, making it easier for you to choose your favorite types for relatively stable investment.

Of course, stock index ETFs can not only be used to go long on the index, but also to go short. Take DSQ as an example, it is one of the most mainstream ETFs for shorting the Nasdaq 100 Index (for the overall reading experience, the following figure only shows part of it):

In addition to the above four types of ETFs, there are also commodity ETFs and currency ETFs.

Commodity ETFs invest in commodities, such as crude oil or gold. Not only can it help diversify a portfolio, making it easier to hedge against economic downturns (e.g., commodity ETFs can provide a buffer during a stock market crash), but the cost of holding a commodity ETF is lower than actually owning the commodity because the former does not involve insurance, storage and other expenses, which is very worry-free.

Currency ETFs are a type of investment tool that tracks the performance of currency pairs consisting of local and foreign currencies. They have many uses, such as speculating on currency exchange rates based on a country's political and economic development, and also for import and export practitioners to diversify their portfolios or hedge against foreign exchange market fluctuations.

The above is an introduction to "What is ETF", "Why is it suitable for ordinary investors", "How to classify and their respective characteristics". In the next article, we will analyze for you how to choose ETF and which types of ETFs are most worthy of long-term investment in November 2023.

The article comes from the Internet:A concise guide to ETF investing: How to choose the category that’s right for you?

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