Similar to stocks, bonds and mutual funds, exchange-traded funds (ETFs) are securities you can add to your investment portfolio. They're another way to potentially grow wealth while working toward your financial goals.
ETFs aren't a new security: 2023 marks the 30th year since the first ETF was listed in the U.S. Many types of ETFs have since sprouted up, and they can help you diversify your portfolio. Reviewing the most popular varieties of ETFs can help you and your financial advisor match your choices to your
What is an exchange-traded fund (ETF)?
Like mutual funds,
Most ETFs track the performance of a market index. For example, if you want to gain broad exposure to large-cap U.S. equities, you can buy an ETF that invests in most or all of the securities in the S&P 500 Index.
Considering the different ETF asset classes
Managing risk while pursuing growth or income are common goals of investing. With such a variety of ETFs to consider, they're a popular way to practice
The most popular ETF asset classes include:
Equity ETFs typically track an index of stocks, which can be great vehicles for building long-term wealth. Some indexes are broad, like ones that track the entire U.S. stock market.
Other equity ETFs let you target more pointedly within the stock portion of your portfolio. For instance, you can buy equity ETFs that invest in stocks with a specific market capitalization, like those within certain sectors or that
Fixed income funds
Fixed income ETFs make it easy to purchase hundreds of bonds that share a characteristic. You can buy a basket of short-term bonds, intermediate-term bonds or long-term bonds. Some ETFs track an index of U.S. Treasury bonds or
Commodities like precious metals, oil, natural gas, cattle and wheat have historically shown low or negative correlations with assets like stocks and bonds. They can also be an
Yet, accessing raw materials to help balance risk over time can be challenging to manage. Commodity ETFs, which may hold physical commodities or invest in
Investing in currency markets can add diversification to your portfolio but can prove tricky to handle on the individual level.
Currency ETFs help you take advantage of exchange rate fluctuations. They typically track a single currency or a basket of currencies. Still, with so many macroeconomic factors at play, this can be a particularly complicated asset class to juggle.
Real estate funds
Historically, real estate has a relatively modest correlation to stock market performance, making it a nice addition to your portfolio. Real estate can also hedge against inflation and generate income.
Real estate ETFs invest in the real estate market, with most primarily holding
Why are there so many ETFs?
Many investors generally appreciate an ETF's ease of access, lower cost and
Of course, like other investments, ETFs can still decline in value and you can face losses, so you'll want to approach an ETF with an investment strategy in mind.
Which type of ETF should I buy?
As you build a well-rounded investment portfolio, you can likely find ETFs that expose you to nearly any assets you desire. When deciding which to move forward with, stick with the asset classes that can help you achieve your investment objectives while aligning with your risk tolerance and time in the market.