DIFFERENT TYPES OF ETFS

With over 14,000 ETFs1 globally, learn which type of ETF is right for you.

WHY ARE THERE SO MANY ETFs?

Two trends have driven growth in the number of ETFs to over 14,000 globally1:

  1. Investor demand;
  2. Improvements in technology that have helped make ETFs low cost and easy to trade.

As an investor you may want to invest in different markets, sectors, or asset types. Want an ETF that covers the whole Straits Times Index (STI)? Or perhaps, you want broad market exposures to US tech stocks (e.g., NASDAQ 100) or UK stocks (e.g., FTSE 100). No problem, there’s an ETF just for that.

COMMON TYPES OF ETFs AVAILABLE TODAY

The majority of ETFs are index-based and aim to replicate a specific index or benchmark. These indexes could be based on stocks like the STI or a bond index. Whatever the underlying asset, an index ETF aims to track index performance by holding all or a representative sample of the index.

For example, the STI tracks the top 30 companies by size listed on the Singapore Stock Exchange. An ETF that tracks the STI will typically hold all 30 stocks in the same proportion as the Index.

Equity ETFs track an index of equities. You can choose ETFs covering large businesses, small businesses, or stocks from a specific country. Equity ETFs also let you target sectors that might be doing well at that time, like tech stocks or banking stocks, which makes them a popular choice.

A bond, or fixed income, ETF is a collection of individual bonds that trades on exchange, making investing in fixed income simple and transparent, especially during periods of market volatility. Bond ETFs allow access to various segments of the domestic and international bond markets.

In Asia, investors of all types are increasingly turning to bond ETFs, driven in large part by the transparency, access, liquidity, and efficiency that they provide.

Commodity ETFs track the price of physical assets such as gold, oil, and wheat. Commodity prices are generally not highly related to prices for stocks and bonds. Commodities also tend to rise in tandem with inflation. For these reasons, investors may use exposure to commodities to help diversify their portfolios, and to align with their views on inflation and the economic outlook.

Often harder to access than stocks, ETFs are a great way to get into commodities. However, commodity ETFs can be less transparent than index or stock ETFs. They often don’t directly own the underlying asset, like gold, but use derivatives2 instead. Derivatives track the underlying price of the commodity but can carry more risk, such as counterparty risk3, than an ETF that owns the underlying asset directly.

Factor investing is an investment approach that involves targeting specific drivers of return across asset classes. And while many factors have been well documented, there are only a few that have historically delivered higher risk-adjusted returns than the broad market over the long run. These equity style factors include:

  • Value investing: Finding securities that are underpriced relative to fundamentals.
  • Momentum investing: Investing in securities with upward trending prices.
  • Quality investing: Preferring companies with strong balance sheets and less volatile earnings.
  • Small size investing: Tilting to companies with a relatively smaller market capitalization.
  • Minimum volatility investing: Investing in stocks that collectively have lower volatility than the broad market.

Factor ETFs capture the power of factors and deliver them in a cost-efficient structure, thereby revolutionizing the way investors access these historically rewarded styles. ETFs can target single factors or multi-factor strategies that provide access to a combination of factors.

Sector ETFs offer investors exposure to a basket of companies in specific industries such as consumer staples or healthcare. Sector ETFs provide investors an opportunity to express their views on a particular industry while limiting their exposure to the risks of owning individual securities.

The modern world is changing at the speed of innovation. This change is felt through mega forces – enduring shifts powerful enough to influence the global economy and affect corporate performance across industries.

Evidence of mega forces is all around, embodied in the products, services, and movements with profound transformative potential. These mega forces include:

  • Digital disruption and artificial intelligence (AI)
  • Geopolitical fragmentation
  • Demographic divergence
  • Future of finance
  • Low-carbon transition

Thematic ETFs capture targeted groups of stocks well positioned to benefit from these shifts in technology, society, demographics, and the environment over time. They are distinct from broad market and factor exposures, and can be viewed as complements to picking individual stocks or sectors.

Active ETFs seek to outperform a specific index – or achieve a specific outcome such as maximising income – by underweighting or overweighting certain securities relative to their index weighting. Both active and index ETFs are professionally managed, but active ETFs typically require more monitoring and trading by the portfolio managers, which can result in higher fees.

We see three distinct categories within active ETFs that help describe each category’s use case:

  1. Alpha strategies: Seek to outperform a benchmark based on proprietary research and insights. These include both fundamental and systematic strategies, as well as active factor strategies that seek to outperform by tilting toward broad, persistent drivers of return.
  2. Outcomes: Options-based strategies that offer targeted investment objectives combining or modifying market exposures via the use of derivatives for portfolio construction.
  3. Exposures: Non-index strategies feature access to segments that are difficult to index, such as cash or commodities, derivative-based exposures, including leveraged, inverse, and single stock products.

The introduction of spot exchange-traded products (ETPs) for certain digital assets in the U.S. on January 11, 2024, represented a significant bridge from traditional finance into the realm of digital assets. Prior to this launch, investors primarily accessed digital assets through crypto exchanges, which often came with operational, tax and custody complexities. The debut of these ETPs coincided with growing interest in digital assets due to geopolitical uncertainty and mega forces such as demographic divergence, with younger populations and the middle class expanding in many emerging economies.

WHICH TYPE OF ETF SHOULD I GO FOR?

Which ETF to invest in all depends on you. Think back to your investment goals and what level of risk you are prepared to take to get the returns you want. As with any investment, you need to understand the risk-return ratio of every ETF, which is available in the fund offering documents, or you may speak to a financial advisor who can help you to analyze which ETF can cater to your investment needs.

KEY TAKEAWAYS

ETFs come in many types, each with the objective to give you access to different assets and markets. The range of ETFs ensures that there will typically be an ETF to match your reward and risk profile. Learn how to build a portfolio of ETFs here.

To recap, we have covered the following types of ETFs:

  1. Equity ETFs
  2. Bond/fixed income ETFs
  3. Commodity ETFs
  4. Factor ETFs
  5. Sector ETFs
  6. Thematic ETFs
  7. Active ETFs
  8. Digital asset ETFs

Investors may consider more than one ETF for your investment goals. For instance, you may invest in some ETFs that offer steady returns with lower risk alongside ETFs that offer more return potential but with more risk.