Types of ETFs
While SPY is an example of an ETF tracking a market index, there are numerous types of ETFs based on the sectors and asset classes they invest in, the styles they follow, and their approach to investing.
The SPDR Financial Select Sector Fund (XLF) is an example of a sector ETF. XLF invests in banking, financial services, and insurance companies, with top holdings in Wells Fargo & Co. (WFC), Berkshire Hathaway, and JPMorgan Chase.
The SPDR S&P 500 (SPY) is an example of an ETF investing in a particular asset class (equities, in this case), while the PowerShares QQQ Trust, Series 1 (QQQ) invests only in non-financial large cap companies, an example of a style-based ETF. The PowerShares QQQ Trust, Series 1 (QQQ), invests in the 100 largest NASDAQ-listed non-financial companies, including Apple (AAPL), Google, and Microsoft.
Lastly, we can classify ETFs by the approach they follow towards investing. Some ETFs, such as the SPDR S&P 500 (SPY), are passively managed ETFs, where rebalancing the portfolio happens sparingly. Some ETFs shuffle their portfolio more frequently and don’t follow any index. These kinds of ETFs are known as “actively managed portfolios.” Leveraged and inverse ETFs fall under actively managed ETFs.
We’ll compare actively managed and passively managed ETFs in the next part of this series.