6 types of specialty ETFs
1. Commodity ETFs
These ETFs investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition in physical commodities like precious metals, natural resources and agriculture. They work either by actually holding and storing the commodityCommodity A raw material that trades in large amounts on a stock exchange. For example, grain, gold, and oil.+ read full definition they invest in (for example, gold or grain), or by tracking a commodity indexIndex A benchmark or yardstick that lets you measure the performance of a stock market, part of a stock market or a single investment. Examples: S&P/TSX, S&P/TSX Canadian Bond Index.+ read full definition through physical holdingsHoldings Shares or other interests in a business. Also refers to investments in a portfolio.+ read full definition and derivatives. Commodity ETFs tend to be higher risk because they are concentrated in one sectorSector A part of the economy where businesses provide the same or related products or services. May also refer to a group.+ read full definition and the prices of commodities move frequently.
2. Inverse ETFs
An inverse ETFInverse ETF An inverse ETF allows investors to “short” an index. It’s called “inverse” because it profits when the index declines (and vice versa). Inverse ETFs can be risky for investors who hold them for too long – they are designed for day-to-day use and investors should monitor their performance daily.+ read full definition allows investors to “short” an index. It’s called “inverse” because it profitsProfits A financial gain for a person or company. Equals the money left over after you subtract your costs from the money you made.+ read full definition when the index declines (and vice versa) – so if a particular index falls 10% the inverse ETF based on it would (in theory) rise 10%. Inverse ETFs can be risky for investors who hold them for too long – they are designed for day-to-day use and investors should monitor their performance daily.
3. Currency ETFs
Currency ETFs invest in a single currency (for example, the U.S. dollar) or basket of currencies (for example, emerging markets). The goal is to follow the movements of those currencies in the foreign exchange market. Currency ETFs can be risky – if the underlying currency or currencies experience big changes in price, you could lose money.
4. Covered call ETFs
These ETFs write covered calls (sell call optionsOptions An investment that gives you the right to buy or sell it at a set price by a set date. The buy right is termed a “call” option, and the sell right is termed a “put” option. You buy options on a stock exchange.+ read full definition on the stocks that the ETF owns) to generate additional income (in the form of premiums).The call optionCall option An agreement that gives you the right to buy a stock, bond, or other investment at a set price by a set date (within a set time period). Also called a “call.” You buy a call hoping that the stock price will rise and you can buy it for less than its market price.+ read full definition buyer buys the option to buy the stockStock An investment that gives you part ownership or shares in a company. Often provides voting rights in some business decisions.+ read full definition from the ETF at the predetermined price in the future. While they’re designed to provide income, covered call ETFs do have risks. For example, if the stock price increases dramatically, the ETF would lose the opportunity to profit from the price increase beyond the predetermined price of the corresponding call option.
5. Managed futures ETFs
Managed futuresFutures A derivative contract that commits you to buy or sell a commodity, currency or stock market index at a set price on a set date in the future. Unlike an option, you can’t change your mind later; you must do what your contract says you will do.+ read full definition ETFs use commodity futures (speculating on the future price of commodities such as natural gas or copper) to deliver positive returns in both up and down markets. They do so by taking both short and long positions to follow market trends. However, if the markets don’t follow that particular trend, you could lose money.
6. Hedge fund ETFs
Hedge fundHedge fund A lightly regulated fund that pools people’s money to invest in different investments. Hedge funds can invest in almost anything. They often mix different approaches to investing as a way to hedge’ or protect investors from poor results.+ read full definition ETFs aim to mirror the stock picks of major hedge funds. For the most part, these ETFs use monthly published data on a particular hedge fund’s holdings. However, hedge funds often buy and sell their holdings quickly (day-to-day), so by the time the holdings are published the ETF might not be an accurate reflection of the underlying fund. And they might see greater volatilityVolatility The rate at which the price of a security increases or decreases for a given set of returns. A stock price that changes quickly and by a lot is more volatile. Volatility can be measured using standard deviation and beta.+ read full definition in difficult market conditions – a risk for investors.
ETFs that primarily use derivatives
As an alternative to investing directly in various assets like stocks or bonds, some ETFs gain exposure to the performance of those assets primarily through the use of derivatives like forwards and futures.