Types of ETFs

Types of ETFs

When choosing which ETF to invest, it is valuable to understand the make-up of each ETF you are considering.  These questions will help you understand and compare the ETFs you are investigating.

  • If it is an index based ETF, is it based on the full replication or optimization of the index it is tracking?  ETFs can hold all the securities of an index or just a representative sampling of the index in correlation to exposure and risk.
  • If the ETF is optimized, what is its style? Some ETFs track a certain investment style or market capitalization (large-cap, small-cap, mid-cap).  
  • What is the fundamental factor used to weight the stocks within the ETF? The majority of ETFs use market capitalization.  The securities within an ETF can also be based on a different fundamental measure.  
  • Is the index it is tracking domestic or international? The ETF market is global, giving investors the opportunity to have ETFs which give them global exposure, exposure to a specific international market and/or the domestic market.
  • What is the ETF's basis of formation? ETFs can track the gamut of investment categories: indices, derivatives, bonds, commodities, sector or industry specific.  Investors need to know their own goals when developing their portfolios to take into account the variety within the ETF market.

Defining the Types of ETFs

Actively managed: These ETFs operate much more similarly to typical mutual funds, where the fund manager buys and sells stocks in the fund according to a set investment strategy. To find the fund's investment objective read its prospectus.

Alternatives: Alternative ETFs are held to be a non-traditional investment. These funds employ strategies similar to hedge funds with inflation expectations, long/short, managed futures, and merger arbitrage strategies creating inverse and leveraged funds. They are a broader classification for ETFs outside of the equity market such as commodity and currency funds.

Asset allocation: These ETFs strive to give investors full diversification in one fund. The fund consists of a mix of asset classes, typically stocks, bonds and currency, to achieve this diversification.

Commodity: ETFs with pooled securities of a raw material such as metals, energy or agriculture products. It is important to note with commodity ETFs, investors do not buy the actual commodity but derivative contracts which mirror the price of the underlying commodity.

Currency: Funds invested in one currency or a basket of currencies such as the dollar, yen, or euro. They can hold the currency or currency-denominated short-term debt instruments with the goal of replicating the movement of its holdings in the foreign exchange market. In essence, they track an exchange rate between foreign currencies. The price is based on foreign exchange futures and not the actual exchange rate.

Dividend: These ETFs will track a dividend benchmark index. The constituents included will be a variety of dividend paying stocks and can be highly diverse so understanding the components of the benchmark is critical.

Equity: Stocks are the underlying securities. The most common type of ETFs.

Fixed income: Funds holding bonds as the underlying securities. These types of funds are typically used to reduce volatility in a portfolio.

Fundamental weighted: A fund which uses another mechanism to weight each security in the fund other than market capitalization. This is also known as smart beta.

Inverse: These ETFs are built for the day trader and experienced investors. These funds are built on a short position thus having an inverse relationships with its benchmark index- if the index goes up, the fund goes and down, and conversely if the index goes down, the fund goes up. These funds react according to investor expectations for that given trading session. They are restructured daily by financial engineers using derivatives to tract movement for one session.

Leveraged: These ETFs are also known as speculative and are best suited for advanced investors and traders. They are similar to inverse ETFs as financial engineers use derivatives to structure them for only one session. Their goal is to magnify investor exposure to an index which may increase returns but also increase risk and volatility. There are also inverse leveraged ETFs.

Market Capitalization (cap): The most common weighting strategy to determine how much of each company's stock will constitute the total of the fund. Cap is determined by calculating the total number of shares multiplied by the price of the share.

Real Estate (REITs): These are income funds designed to emulate an underlying REIT index. An REIT, real estate investment trust, is a business which owns/finances incoming producing real estate. There are two types of REITs, equity whose income comes from rent and sales of properties, and mortgage which are invested in mortgages tied to properties. REITs allow investors to hold large scale properties in their portfolios through the purchase of a stock.

Sector/industry: These ETFs hold securities in one industry in the market like a general market like pharmacy or technology or in a specific market like green energy.

 

Holdings data reflects the accounting positions as of the date listed, and may not reflect any trades made on that date.

On December 2, 2015, OppenheimerFunds, Inc. acquired 100% of the stock interests of VTL Associates, LLC, the investment adviser to the Oppenheimer Revenue Weighted ETF Trust, formerly the RevenueShares ETF Trust (the “Trust”). As of that date, OppenheimerFunds Distributor, Inc. became the general distributor and principal underwriter for each series of the Trust.

An investment in the funds is subject to investment risk, including the possible loss of principal amount invested. Fund returns may not match the return of their respective Index, known as non-correlation risk, due to operating expenses incurred by the funds. The alternative weighting approach employed by the each Fund (i.e., using revenues as a weighting measure), while designed to enhance potential returns, may not produce the desired results. Because each fund is rebalanced quarterly, portfolio turnover may exceed 100%. The greater the portfolio turnover, the greater the transaction costs, which could have an adverse effect on Fund performance. The risks associated with each specific fund are detailed in the prospectus and could include factors such as increased volatility risk, small and medium capitalization stock risk, concentration risk, non-diversification risk, financials sector risk, American Depositary Receipt risk, currency exchange risk, foreign market risk, growth style investing risk, portfolio turnover risk, and/or special risks of exchange-traded funds.

The Fund’s per share net asset value or “NAV” is the value of one share of the Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV of the Fund and the market return is based on the market price per share of the Fund. The price used to calculate market return (“Market Price” or “MP”) is determined by using the midpoint between the highest bid and the lowest offer on the primary stock exchange on which the shares of the Fund are listed for trading when the fund’s NAV is calculated at market close. Market and NAV returns assume that dividends and capital gain distributions have been reinvested in the Fund at Market Price and NAV, respectively.) Returns less than one year are cumulative.

STANDARD & POOR'S and S&P are registered trademarks of Standard & Poor's Financial Services LLC ("S&P") and have been licensed for use by VTL Associates, LLC, Fund Advisor. No financial product offered by VTL Associates, LLC, Fund Advisor or its affiliates is sponsored, endorsed, sold or promoted by S&P or its affiliates, and S&P and its affiliates make no representation, warranty or condition regarding the advisability of buying, selling or holding units/shares in such products.