What is an ETF?

An Exchange-Traded Fund (ETF) is a type of investment fund that contains various investment assets, ranging from stocks and bonds to commodities and real estate. ETFs trade on stock exchanges, like individual stocks, allowing investors to buy and sell shares throughout the trading day. ETFs are being used more and more by financial advisors as over 2,000 new ETPs have been added to advisor toolkits over the last decade, with industry AUM increasing by 5x (2014-2024). ETFs can be used to give their clients broad market exposure or to invest in specific sectors. 

“ETFs have become a transformative force in the world of investing. Over the past few decades, the global ETF market has grown exponentially— starting out in the 1990s to over 14 trillion dollars today. 1 Originally a tool mainly used by institutional investors for quick trading purposes, ETFs in many cases are now foundational in investors’ portfolios. This remarkable growth is likely driven by their liquidity, transparency, and cost-effectiveness, making ETFs an essential tool for both retail and institutional investors alike.”

Daniel Prince, CFA
iShares® by BlackRock
U.S. Head of iShares product consulting and U.S Head of iShares Core, Stylebox, and Sustainable ETFs

TABLE OF CONTENTS

• Types of ETFs
  
• ETFs vs. Mutual Funds
  
• Benefits of ETFs
  
• ETF FAQs

How Many Types of ETFs Are There?

There are many different types of ETFs. The ETF market is vast and diverse, catering to various investment objectives. As ETFs continue to gain popularity, financial advisors should educate their clients about the key aspects of these investment opportunities.

“Advisors have been shown to add value to a client’s portfolio through asset allocation, cost effective implementation and tax smart management.  ETFs are a very effective tool for advisers to use in adding value in these areas given their cost and tax efficiency and effectiveness in building diversified portfolios.” 

Tom Robinson
College for Financial Planning®—a Kaplan Company
Chair - Department of Financial Analysis and Investment Management

Below are some of the most common types of ETFs and information about what makes them unique.

Equity ETFs

Equity ETFs are commonly designed to seek to track the performance of a specific stock market index, such as the S&P 500 or the Nasdaq Composite. They can offer financial advisors a convenient and cost-effective way to give their clients broad exposure (diversification) to the stock market without having to purchase individual stocks.

Equity ETFs can also track specific sectors or industries, allowing financial advisors to give their clients the ability to target their investments based on their market outlook or risk tolerance. Two common sectors that can be tracked in Equity ETFs are Healthcare and Technology. 

• Healthcare: The healthcare sector includes pharmaceutical companies, medical device manufacturers, and healthcare providers. Some examples of healthcare ETFs include the iShares U.S. Healthcare ETF (IYH) and the Vanguard Health Care ETF (VHT).
• Technology: The technology sector includes software companies, hardware manufacturers, and internet service providers. Some examples of technology ETFs include the Invesco QQQ Trust (QQQ) and the Technology Select Sector SPDR Fund (XLK).

Fixed Income ETFs

Fixed Income ETFs offer financial advisors a way for their clients to access certain types of bonds that may be difficult for individual investors to purchase directly while maintaining the diversification benefits of equity ETFs. Some of the common types of fixed income ETFs include:

• Government bonds
  
• High-Yield bonds
  
• Corporate bonds
  
• Municipal bonds
  

Financial advisors should monitor market risks, credit fluctuations and interest rate changes. Understanding the concept of duration is also important. Duration measures the sensitivity of a bond or bond ETF’s price to changes in interest rates. Higher duration means greater price volatility. Financial Advisors should be able to explain this relationship to their clients and choose Fixed Income ETFs with duration that align with their clients’ risk tolerance and investment goals.

Another aspect for financial advisors to consider when recommending Fixed Income ETFs are the tax implications. The interest income on bonds is generally taxable so being familiar with how taxes work with different types of bonds should also be a talking point when talking with clients. 

Commodity ETFs

Commodity ETFs are a simple way to gain exposure to the asset class of commodities. These ETFs seek to track the performance of commodities, such as precious metals (gold, silver, platinum), energy sources (crude oil, natural gas), agricultural products (corn, soybeans, wheat), and industrial metals (copper, aluminum, nickel).

Another possible benefit of Commodity ETFs is the potential for inflation hedging. Commodities have historically performed well during periods of inflation.as their prices have risen alongside the general cost of living. Over the past 30 years commodities as tracked by the S&P GSCI Index have returned an average of 19.8% during years in which CPI was over 2% vs. -16.9% when inflation was less than 2% (source: Bloomberg 12/31/1995 - 12/31/2024). Therefore, incorporating Commodity ETFs into a portfolio can serve as a hedge against inflation.

Investing in Commodity ETFs does involve certain risks, such as price volatility, supply and demand dynamics, and geopolitical uncertainties. However, with thorough research and understanding of current market conditions financial advisors can help their clients make informed decisions and seek to manage risks effectively.

Overall, Commodity ETFs can provide a compelling investment opportunity for those seeking exposure to commodities. Their convenience, diversification potential, and potential for inflation hedging help make them a valuable addition to many investment portfolios.

Currency ETFs

Currency ETFs offer clients a way to gain exposure to foreign exchange markets without the complexities and potential risks of directly trading currencies. By investing in a currency ETF, clients can diversify their portfolios and potentially benefit from currency fluctuations without the need for specialized knowledge or trading expertise.

Currency ETFs are typically composed of a portfolio of forward contracts or spot currency holdings that aim to mirror the value of the underlying currency or index.

One potential advantage of currency ETFs is their liquidity. Unlike directly trading currencies, which can be subject to wide bid-ask spreads and limited trading volume, currency ETFs can offer clients the ability to buy and sell shares easily through traditional brokerage accounts. This potential liquidity can allow clients or financial advisors to quickly make adjustments when needed.

Currency ETFs can also provide financial advisors a way to help their clients hedge against currency risk. By investing in a currency ETF that may be negatively correlated to the home currency, advisors can offset potential losses from unfavorable currency movements. This hedging strategy is particularly relevant for clients with international exposure.

It's important to note that currency ETFs are subject to currency fluctuations, and financial advisors and their clients should carefully consider the risks associated with investing in foreign exchange markets.

Specialty ETFs

Specialty ETFs cater to niche market segments and specific investment themes, providing focused attention to clients with particular interests or objectives. These ETFs may focus on sectors like technology, healthcare, or renewable energy, or they may track broader themes such as socially responsible investing or ESG (environmental, social, and governance) factors.

In addition to offering exposure to emerging trends, specialty ETFs can also allow financial advisors to cater to their clients' values and preferences. For instance, there are specialty ETFs that focus on companies with strong environmental, social, and governance (ESG) practices, ethical investing, or gender diversity such as iShares MSCI KLD 400 Social ETF (DSI).

Specialty ETFs can also offer diversification benefits, as they are typically not tied to the performance of a single company or a small group of companies. However, specialty ETFs can also come with higher volatility and risk than broad-market ETFs.

Therefore, financial advisors should carefully evaluate their client's risk tolerance and investment objectives before discussing specialty ETFs. Additionally, advisors should conduct thorough research to identify specialty ETFs with strong track records, experienced management teams, and transparent investment strategies.

Overall, specialty ETFs can offer financial advisors a valuable tool that may help customize their clients' portfolios, align with their values and interests, and tap into emerging market trends. By incorporating specialty ETFs into their investment strategies, advisors can provide their clients with the potential for growth and diversification while addressing their unique preferences and goals. 

Factor ETFs seek to track specific investment factors, such as value, small size, momentum, or volatility. These factors have been identified as drivers of historical returns. Factor ETFs aim to capture these premiums by systematically selecting stocks that exhibit these characteristics.

One of the most common factor ETFs includes those that focus on "quality stocks" or "blue-chip stocks." They have typically been large, well-established companies with a long history of profitability and/or dividend payments. 

Some of the key characteristics of quality stocks include:

• Predictable earnings
• Strong financial performance
• Stable dividends
• Strong management
• Sustainable competitive advantage

Quality stocks have often been considered a suitable investment for clients who want to be long-term investors. 

ETFs vs. Mutual Funds

Many ETFs can offer several advantages over traditional mutual funds, including lower expense ratios, greater tax efficiency, and intraday trading flexibility. They can provide a cost-effective way to build a diversified portfolio and align investments with a client’s financial goals.

Benefits of ETFs

ETFs have emerged as a powerful tool for financial advisors seeking to enhance their clients' portfolios and streamline their investment strategies. There are several reasons financial advisors may want to consider incorporating ETFs into their practice.

Client-Centric Benefits

ETFs can offer many advantages that could directly benefit clients, including diversification, lower costs, tax efficiency, and intraday trading flexibility. By utilizing ETFs, advisors can construct portfolios that may align with their client's risk tolerance, investment goals, and financial circumstances.

Enhanced Portfolio Management 

ETFs can also give advisors a versatile, efficient way to help manage client portfolios. Their broad market exposure, sector-specific options, and diverse asset classes can enable advisors to create tailored investment solutions and adapt to changing market conditions.

Streamlined Operations

The ease of trading ETFs on stock exchanges helps simplify portfolio management and can reduce administrative burdens for advisors. This efficiency helps advisors focus more on client relationships and strategic planning.

ETF FAQs

Below are commonly asked questions and answers about ETFs.

What is the Difference Between an ETF and a Mutual Fund?

Typically, both ETFs and mutual funds pool money from multiple investors to invest in a diversified portfolio of assets. ETFs though trade on stock exchanges like individual stocks, offering intraday trading flexibility, while mutual funds are typically priced at the end of the trading day. ETFs generally have lower expense ratios and greater tax efficiency compared to mutual funds.

What is a Typical Expense Ratio Range for ETFs?

The expense ratio for an ETF depends on the type of fund and its investment strategy. Generally, ETFs with expense ratios below 0.50% are considered to be low-cost. As of 2/24/25, the average net expense ratio for U.S. domiciled ETFs was 59 bps. It's important to compare expense ratios across similar ETFs before making an investment decision.

What is the Difference Between an ETF and an Index Fund?

An index fund is a type of mutual fund that seeks to track a specific market index, such as the S&P 500. ETFs that seek to track an index are often called index ETFs. The key difference lies in how they are traded: ETFs trade on stock exchanges, while index mutual funds are typically bought and sold through a fund company. This does not happen throughout the day, but only at the close of business. ETFs, like mutual funds, can also be actively managed, so not all ETFs track an index.

What is an ETP in Crypto?

Exchange-traded products (ETPs) are a family of securities tracking the value of one or more underlying assets. ETPs can be traded on regulated exchanges in the same manner as company stocks and shares.

A cryptocurrency ETP is an ETP that invests in cryptocurrencies or cryptocurrency-related assets. These ETPs offer financial advisors’ clients a way to gain exposure to the cryptocurrency market without having to directly buy and hold cryptocurrencies. Cryptocurrency ETPs are a relatively new and evolving investment product though so they may carry higher risks compared to traditional ETPs.

Typically, crypto exchange traded products are not investment companies registered under the Investment Company Act of 1940, and therefore are not subject to the same regulatory requirements as mutual funds or ETFs registered under the Investment Company Act of 1940. Investments in these products are speculative and involve a high degree of risk.

Earn a Certificate in ETFs & Portfolio Construction

To further enhance your expertise in ETFs and portfolio construction, consider earning a specialized certificate in ETFs and Portfolio Construction. A certificate program like one from the College for Financial Planning®-a Kaplan Company and developed in collaboration with iShares® by BlackRock, one of the largest global asset managers and a leading provider of ETFs, is designed to provide financial advisors with the right tools, education, and resources to have better conversations about ETFs with their clients. You’ll gain a better understanding of ETFs and how they can be used to develop a broad range of diversified investment portfolios that help meet client needs. 

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¹BlackRock GBI. The global ETF industry had $14 trillion AUM as of 9/30/2

Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.

Buying and selling shares of ETFs may result in brokerage commissions.

Diversification and asset allocation may not protect against market risk or loss of principal.

There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.

Actively managed funds do not seek to replicate the performance of a specified index, may have higher portfolio turnover, and may charge higher fees than index funds due to increased trading and research expenses.

Index funds are not actively managed and will not attempt to take defensive positions under any market conditions, including declining markets.

There can be no assurance that performance will be enhanced or risk will be reduced for funds that seek to provide exposure to certain quantitative investment characteristics ("factors"). Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. In such circumstances, a fund may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses.

Commodities' prices may be highly volatile. Prices may be affected by various economic, financial, social and political factors, which may be unpredictable and may have a significant impact on the prices of precious metals.

The price of gold and precious-metal related securities historically has been very volatile and may adversely affect the financial condition of those companies. The production and sale of precious metals can be affected by economic, financial and political factors, which may be unpredictable and significantly impact supply and prices.

Investing in digital assets involves significant risks due to their extreme price volatility and the potential for loss, theft, or compromise of private keys. The value of the shares is closely tied to acceptance, industry developments, and governance changes, making them susceptible to market sentiment. Digital assets represent a new and rapidly evolving industry, and the value of the Shares depends on their acceptance.  Changes in the governance of a digital asset network may not receive sufficient support from users and miners, which may negatively affect that digital asset network’s ability to grow and respond to challenges  Investing in the Trust comes with risks that could impact the Trust's share value, including large-scale sales by major investors, security threats like breaches and hacking, negative sentiment among speculators, and competition from central bank digital currencies and financial initiatives using blockchain technology. A disruption of the internet or a digital asset network would affect the ability to transfer digital assets and, consequently, would impact their value. There can be no assurance that security procedures designed to protect the Trust’s assets will actually work as designed or prove to be successful in safeguarding the Trust’s assets against all possible sources of theft, loss or damage.  

To better understand the similarities and differences between investments, including investment objectives, risks, fees, and expenses, it is important to read the products’ prospectuses. Exchange traded funds (ETFs) combine features of both mutual funds (they hold a basket of securities) and stocks (they trade on exchanges intraday at market price, which may be greater or less than net asset value). However, there are a number of key differences between mutual funds and ETFs. First, shares of ETFs are not individually redeemed from the fund, which insulates investors from other shareholder activities. Mutual funds are accessed directly from the fund company or through a select broker that has an arrangement with the fund company to sell their funds. Pricing generally occurs once a day and investors buy or redeem shares of the mutual fund at the end-of-day net asset value, less any applicable fees. In addition, most ETFs seek to track a market index, before fees and expenses. Some ETFs may be actively managed and do not seek to replicate the performance of a specified index. The structure of active and index mutual funds is the same, but the management strategy differs in that active mutual funds seek to outperform their benchmark while the goal of index mutual funds is to track their index. Finally, transactions in shares of ETFs may result in brokerage commissions and will generate tax consequences. Some mutual funds may charge sales loads or redemption fees. Both mutual funds and ETFs are obliged to distribute portfolio gains to shareholders. Certain traditional mutual funds can be tax efficient as well. Due to fund structure, mutual fund holders may be subject to taxable capital gains distributions due to other investors’ redemptions directly to the mutual fund. Taxable capital gain distributions can occur to ETF investors based on stocks trading within the fund as the ETF creates and redeems shares and rebalances its holdings.

Transactions in shares of ETFs may result in brokerage commissions and may generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders.

This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Similarly, the material does not constitute, and should not be relied on as, legal, regulatory, accounting, tax, investment, trading, or other advice. Any financial, tax, or legal information contained herein is included for informational purposes only.

This material contains general information only and does not take into account an individual's financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial professional before making an investment decision.

iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc. and its affiliates. BlackRock is not affiliated with Kaplan or The College for Financial Planning.

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