What do you expect to achieve for your client from investing in an ETF? Whatever your answer to that question, there is likely to be a solution available in the market. Although most ETFs aim to track indices that are weighted by market capitalisation, ETFs come in a growing range of shapes and sizes.

Covering global and regional equity and fixed-income markets, as well as commodities and other alternative asset classes, ETFs can range from products that offer the widest coverage of the markets to those that invest in a specific market segment. And because there is so much to choose from, they can fulfil a growing range of roles in portfolio management.

They can be used either strategically or for shorter-term purposes, and to gain access to broad or niche exposures. For example, they can provide broad liquid exposure to well-known benchmarks such as the FTSE 100 index for UK equities or S&P 500 index for exposure to large-cap US equities. They can also be used for shorter-term or more tactical positions, such as to a particular investment style.

Some ETFs tilt towards growth or value stocks, while others track stocks of a certain size. ETFs may offer geographical exposure to a particular region or single country. And fixed-income ETFs can cover a variety of durations, credit qualities and issuer types.

Understanding the different types of ETFs and their benefits can help advisers make smarter investment decisions when managing their clients’ portfolios.

What affects index tracking?

ETFs are designed to closely track their benchmark index, but doing so with complete accuracy is practically impossible. The extent to which an ETF outperforms or underperforms its benchmark can depend on a range of factors, ranging from replication methodology to investment fees and taxation, as we explore here.

What are index ETFs and how do they track their benchmarks?

The large part of investor assets in ETFs are invested in traditional index-based ETFs. These give investors efficient and low-cost access to a given market. They typically use one of three strategies to track their benchmarks as closely and effectively as possible: full replication, sampling and optimisation. Learn more.

What are the potential benefits of index fund investing?

It is easy to understand the growing popularity of index funds and ETFs. Traditional index investing – through market-cap-weighted ETFs or mutual funds – has several powerful advantages over most actively managed funds. Here are some of them.

What are the different types of ETFs?

While index ETFs form the bedrock of ETF investing, innovation in the marketplace has led to a wider variety of fund types. From actively managed ETFs to inverse and leveraged, there is an ETF to suit many investor objectives, although some can carry greater risks than others. Watch to learn more.

Why do investment costs matter?

Costs can have a significant effect on investment outcomes. Given the ‘zero-sum game’ nature of financial markets, for each position that outperforms the market, there must be a position that underperforms the market by the same amount. After accounting for costs, the aggregate performance of investors is less than zero sum and, as costs increase, the performance deficit becomes larger. Learn why.

Conclusion

In a fast-paced investment environment, ETFs can be used to make quick and efficient adjustments to portfolios. The ease with which they can be traded is a key benefit when making portfolio adjustments. Their underlying structure also allows them to provide investors with enhanced liquidity relative to other investment vehicles.