Is an ETF debt or equity?
An ETF, or exchange traded fund, is a collection of securities such as equities, bonds, and options that is bought and sold like a stock in real time on a stock exchange.
An exchange-traded fund (ETF) is a collection of investments such as equities or bonds. ETFs will let you invest in a large number of securities at once, and they often have cheaper fees than other types of funds. ETFs are also more easily traded.
Other assets, such as mutual funds or ETFs, may be considered equity securities as long as their holdings are composed of pooled equity securities.
ETFs or "exchange-traded funds" are exactly as the name implies: funds that trade on exchanges, generally tracking a specific index. When you invest in an ETF, you get a bundle of assets you can buy and sell during market hours—potentially lowering your risk and exposure, while helping to diversify your portfolio.
Exchange-traded funds (ETFs) are a type of index funds that track a basket of securities. Mutual funds are pooled investments into bonds, securities, and other instruments. Stocks are securities that provide returns based on performance.
- Debt funds offer stable returns with lower risk, while equity funds have the potential for higher returns but higher risk.
- Debt funds generate income through interest, while equity funds generate income through dividends and capital gains.
Mutual funds are priced once a day at the net asset value and they're traded after market hours. ETFs are traded throughout the day on stock exchanges just as individual stocks are. ETFs often have lower expense ratios and are generally more tax-efficient due to their more passive nature.
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.
- Higher Management Fees. Not all ETFs are passive. ...
- Less Control Over Investment Choices. When you invest in an ETF, you're buying a basket of stocks intended to align with the fund's objectives. ...
- May Not Beat Individual Stock Returns.
Bonds are debt instruments. They are a contract between a borrower and a lender in which the borrower commits to make payments of principal and interest to the lender, on specific dates.
What are the three types of ETFs?
- Equity ETFs. Equity ETFs track an index of equities. ...
- Bond/Fixed Income ETFs. It's important to diversify your portfolio2. ...
- Commodity ETFs3 ...
- Currency ETFs. ...
- Specialty ETFs. ...
- Factor ETFs. ...
- Sustainable ETFs.
ETFs are bought and sold just like stocks (through a brokerage house, either by phone or online), and their price can change from second to second. Mutual fund orders can be made during the day, but the actual trade doesn't occur until after the markets close.
Fund (ticker) | YTD performance | Expense ratio |
---|---|---|
Vanguard Information Technology ETF (VGT) | 8.6 percent | 0.10 percent |
Financial Select Sector SPDR Fund (XLF) | 12.4 percent | 0.09 percent |
Energy Select Sector SPDR Fund (XLE) | 13.5 percent | 0.09 percent |
Industrial Select Sector SPDR Fund (XLI) | 10.8 percent | 0.09 percent |
The types of ETFs are generally categorized by asset class, such as stocks, bonds, commodities and currencies. Within those asset classes, ETF types are broken into many sub-classes and sub-categories.
Ticker | Fund | AUM |
---|---|---|
SPY | SPDR S&P 500 ETF Trust | $363.23B |
IVV | iShares Core S&P 500 ETF | $300.18B |
VTI | Vanguard Total Stock Market ETF | $288.78B |
VOO | Vanguard S&P 500 ETF | $286.59B |
ETF issuers collect any dividends paid by the companies whose stocks are held in the fund, and they then pay those dividends to their shareholders. They may pay the money directly to the shareholders, or reinvest it in the fund.
Points | Debt | Equity |
---|---|---|
Repayment | Fixed periodic repayments | No obligation to repay |
Risk | Lender bears lower risk | Investors bear higher risk |
Control | Borrower retains control | Shareholders have voting rights |
Claims on Assets | Secured or unsecured claims on assets | Residual claims on assets |
With equity financing, there is no loan to repay. The business doesn't have to make a monthly loan payment which can be particularly important if the business doesn't initially generate a profit. This in turn, gives you the freedom to channel more money into your growing business.
Debt finance is money provided by an external lender, such as a bank. Equity finance provides funding in exchange for part ownership of your business, such as selling shares to investors. Both have pros and cons, so it's important to choose the right one for your business.
The choice comes down to what you value most. If you prefer the flexibility of trading intraday and favor lower expense ratios in most instances, go with ETFs. If you worry about the impact of commissions and spreads, go with mutual funds.
Why choose an ETF over a mutual fund?
ETFs have several advantages for investors considering this vehicle. The 4 most prominent advantages are trading flexibility, portfolio diversification and risk management, lower costs versus like mutual funds, and potential tax benefits.
ETFs offer advantages over stocks in two situations. First, when the return from stocks in the sector has a narrow dispersion around the mean, an ETF might be the best choice. Second, if you are unable to gain an advantage through knowledge of the company, an ETF is your best choice.
For most standard, unleveraged ETFs that track an index, the maximum you can theoretically lose is the amount you invested, driving your investment value to zero. However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely.
ETFs may close due to lack of investor interest or poor returns. For investors, the easiest way to exit an ETF investment is to sell it on the open market. Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF.
A leveraged ETF's price can theoretically go negative, but it's extremely rare and usually only happens in extreme market conditions. Leveraged ETFs use financial leverage to amplify the returns of an underlying asset, such as the S&P 500 Index.
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