Koolgal ETF Compass: Navigating Markets With Diversified ETF Investments

🌟🌟🌟Just like a compass which is a device that shows the right direction for navigation, I have an ETF Compass that I use to navigate and chart the direction of my portfolio.

For those who are new to ETF Investing, an ETF is an Exchange Traded Fund which comprises of a basket of securities that tracks or seeks to outperform an underlying index.

There are many types of ETFs.  They can be categorised by the type of assets they track.  ETFs can also be categorised as either passive or active ETFs. 

The main categories of ETFs are Equity ETFs, Fixed Income ETFs, Commodity ETFs, Currency ETFs, Sustainable ETFs and Specialty ETFs. 

EQUITY ETFs

Equity ETFs are the most common type of ETFs.  Equity ETFs are also known as stock ETFs.  They typically track an index of stocks such as the S&P500 Index, the Nasdaq 100 Index and the Dow Jones Index.  A good example is $SPDR S&P 500 ETF Trust(SPY)$  which tracks the S&P500 Index. 

Equity ETFs types are broadly categorised by market capitalisation, investment style, investment strategy and regional exposure.  Equity ETFs may also be categorised by sector too. 

Market Capitalisation: This is also known as market cap which is the stock price multiplied by its outstanding shares.  Companies are broadly divided into 3 main market caps - Large Cap (USD 10 Billion or more), Mid Cap (USD 2 Billion to USD 10 Billion) and Small Cap (USD 300 million to USD 2 billion).

Investment Style : An equity ETF's style can either be growth or value.  Growth stocks typically have higher Price to Earnings (P/E) ratios and are expected to grow more rapidly than the broader market. 

 In contrast Value stocks generally trade at relatively cheap valuations compared to their respective earnings and to the broader market.   Technology ETFs are a great example of the Growth style while Dividend ETFs are a large segment of the value stock category.

Investment Strategy :  ETFs most commonly follow a passive strategy of tracking a benchmark index of stocks.  Some stock ETFs are actively managed while other strategies may use futures or options such as Leveraged ETFs and Inverse ETFs.

Regional Exposure : An ETF's regional exposure can be a focus on a specific country, exposure to a region such as Asia or it can be global exposure.  International ETFs are generally those that focus on countries outside the US.

Sector:  There are 11 sectors, the most common of which include the technology, healthcare,   financial and energy sectors.  There are also sub sectors that focus on a narrower area such as AI within the Tech sector.

FIXED INCOME ETFs

Fixed Income ETFs are also known as Bond ETFs.  They typically track an index of bonds such as iShares 20+ Year Treasury Bond ETF (TLT)$iShares 20+ Year Treasury Bond ETF(TLT)$    Fixed Income ETFs are primarily categorised by the average duration of maturity of the fund's holdings.  Bond ETFs may also be categorised by the issuer type, credit quality, yield or regional exposure.

Fixed Income ETFs may also be categorised by :

Average duration or maturity date.  This criteria is used to classify bonds into 3 main categories - Short term (up to 3 years), Intermediate Term (3 to 10 years) and Long Term (longer than 10 years and up to 30 years).

Issuer Type :  This describes the entity that issues the bonds held in a fund.  The primary issuing entities are banks, corporations, governments and municipalities.

Credit quality and yield:  A Fixed Income ETF's credit quality measures the risk of the issuer which determines the yield.  For example a high yield or junk bond ETF, may track an index of bonds issued by corporations that have an elevated risk of default.  In contrast a Treasury Bond ETF would generally be low yielding because the US government has an extremely low risk of default.

Regional exposure : This describes the country or region of the world where the underlying bond holdings are issued.

COMMODITIES ETFs

Commodities ETFs typically track the price movement of an underlying commodity or index of commodities such as oil, gold or agricultural products.  Or they may track an index representing a basket of many commodities.  The main types of commodity ETFs can be broken down into categories by strategy, including physically backed funds, futures based, equity based funds or Exchange Traded Notes (ETNs). 

The main types of commodity ETFs include:

Physically backed commodity ETFs - These funds directly hold commodities stored in a physical location.  Typical examples include Gold,  Silver or Platinum.   $SPDR Gold Shares(GLD)$  is the largest Gold ETF. 

Futures Based Commodities ETFs -  These are the most common type of Commodity ETFs.  These funds buy futures, forwards or swap contracts on the benchmark commodity. 

Equity based Commodities ETFs - These funds hold stocks of companies that are associated with the mining and production or transport of commodities. 

Commodity ETNs - Exchange Traded Notes are not ETFs but are exchange traded securities.  ETNs use debt contracts issued by a financial institution that agrees to pay interest that is linked to the returns of a specified commodity. 

CURRENCY ETFs

Currency ETFs invest in the currencies of various countries and are typically used by investors to profit from the price movements of a given country versus another country or group of countries.  For example the largest currency ETF is the Invesco DB US Dollar Bullish Fund $Invesco DB US Dollar Index Bullish Fund(UUP)$ which uses futures contracts to profit when the US Dollar is stronger in relation to a basket of foreign currencies. 

SUSTAINABLE ETFs 

Sustainable ETFs are also known as ESG ETFs.  These are ETFs that typically track the performance of an index of stocks or bonds issued by companies that have certain environmental, social and governance characteristics.  The largest sustainable ETF in the market is the iShares ESG Aware MSCI USA ETF $iShares ESG Aware MSCI USA ETF(ESGU)$  

SPECIALITY ETFs

There are 2 types of Speciality ETFs which are becoming popular in recent times.  These Speciality ETFs offer much greater growth potential but also at a much higher risk. 

Inverse ETFs go up when the target index goes down.  This is similar to investors short selling a stock as its price falls.  For example the Ultra Pro Short QQQ $ProShares UltraPro Short QQQ(SQQQ)$  is a 3x leveraged inverse ETF that tracks the Nasdaq 100 Index. 

Leveraged ETFs aim to maximise returns by using leverage to invest.  For example, a leveraged ETF will typically say how much they are leveraged - Direxion Daily TSLA Bull 2x shares (TSLL). $Direxion Daily TSLA Bull 2X Shares(TSLL)$  is a short term tactical tool that aims to deliver 2 times the price return for a single day of Tesla stock.

In my next article, I will cover in detail the various types of ETFs and how I Invest in these ETFs.  I will also cover the Pros and Cons of investing in ETFs. 

I like to invest in ETFs as they are a low cost way to earn a return similar to an index or commodity.  They can also help me to diversify my portfolio. 

Investing does not have to be complicated.  ETFs provide me with a compass to navigate the markets and are powerful tools to add to any portfolio.  Whether you are a beginner or experienced trader, ETFs are a great way to diversify a portfolio and minimise market risks.

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