What Are the Different Types of ETFs?

With thousands of ETFs traded around the world, there are dozens of different types of ETFs available for investors to build an ETF portfolio. While the range of offerings can at first appear overwhelming, learning the basic categories of ETFs can make investment research and decisions easier. 

What Are ETFs? 

ETFs are exchange-traded funds that hold other investment assets, such as stocks or bonds. Most ETFs passively track the performance of a benchmark index, such as the S&P 500. ETFs’ ability to trade intra-day on an exchange, combined with their diversified structure, makes them a low-cost hybrid of stocks and mutual funds. 

Types of ETFs: Breaking Down the Basics 

The types of ETFs can be broken down into primary categories, beginning with the main investment asset classes, then by investment style, sector, strategy or regional exposure.

For example, asset classes include stocks, bonds, commodities and currencies. There are also ETFs that invest in multiple assets, ETFs that use alternative strategies like futures or options and ETFs with a focus on sustainability. 

The main types of ETFS include: 

  • Equity ETFs 
  • Fixed Income ETFs 
  • Commodity ETFs 
  • Currency ETFs 
  • Multi-asset ETFs 
  • Alternatives ETFs 
  • Sustainable ETFs 

Equity ETFs 

Equity ETFs, also known as stock ETFs, typically track an index of stocks, such as the S&P 500 index. Equity ETF types are broadly categorized by market capitalization, investment style, investment strategy and regional exposure. Equity ETFs may also be categorized by sector. 

Equity ETFs may be categorized by: 

  • Market capitalization: Known as “market cap,” this is a stock’s price multiplied by its outstanding shares. Companies are broadly divided into three main market caps: large-cap ($10 billion or more), mid-cap ($2 billion to $10 billion), and small-cap ($300 million to $2 billion). 
  • Investment style: An equity ETF’s style can be either growth or value. Growth stocks typically have higher P/E ratios and are expected to grow more rapidly than the broader market, whereas value stocks generally trade at relatively cheap valuations compared to their respective earnings and to the broader market. Technology ETFs are a prime example of the growth style and dividend ETFs are a large segment of the value stock category. 
  • Investment strategy: ETFs most commonly follow a passive strategy of tracking a benchmark index of stocks. Some stock ETFs are actively managed, while other strategies may use futures or options, such as leveraged ETFs and inverse ETFs
  • Regional exposure: An ETF’s regional exposure can be a focus on a specific country, exposure to a region, such as the Pacific Rim, or it can be global exposure. International ETFs are generally those that focus on countries outside the U.S. 
  • Sector: There are 11 sectors, the most common of which include the technology, health care, financial and energy sectors. There are also sub-sectors that focus on a narrower area, such as artificial intelligence within the tech sector. 

Fixed Income ETFs 

Fixed income ETFs, also known as bond ETFs, typically track an index of bonds, such as the Lehman Brothers US Aggregate Bond Index. Fixed income ETFs are primarily categorized by the average duration or maturity of the fund’s holdings. Bond ETFs may also be categorized by issuer type, credit quality, yield or regional exposure. 

Fixed income ETFs may be categorized by: 

  • Average duration or maturity date: This criterion is used to classify bonds into three main categories: short-term (up to three years), intermediate term (three to 10 years), and long term (longer than 10 and up to 30 years). 
  • Issuer type: This describes the entity that issues the bonds held in a fund. The primary issuing entities are banks, corporations, governments and municipalities. 
  • Credit quality and yield: A fixed income ETF’s credit quality measures the risk of the issuer, which determines the yield. For example, a high-yield, or junk bond ETF, may track an index of bonds issued by corporations that have an elevated risk of default, whereas a Treasury bond ETF would generally be low yielding because the U.S. government has an extremely low risk of default. 
  • Regional exposure: This describes the country or region of the world where the underlying bond holdings are issued.

Commodity ETFs 

Commodity ETFs typically track the price movement of an underlying commodity or index of commodities, such as oil, gold or agricultural products, or they may track an index representing a basket of many commodities. The main types of commodity ETFs can be broken down into categories by strategy, including physically backed funds, futures-based funds, equity-based funds, and ETNs. 

The main types of commodity ETFs include: 

  • Physically backed commodity ETFs: These funds directly hold commodities stored in a physical location. Typical examples include commodities, gold, silver or platinum. 
  • Futures-based commodity ETFs: The most common type of commodity ETF, these funds buy futures, forwards, or swap contracts on the benchmark commodity.
  • Equity-based commodity ETFs: These funds hold stocks of companies that are associated with the mining and production or transport of commodities. 
  • Commodity ETNs: Exchange-traded notes are not ETFs but are exchange-traded securities. ETNs use debt contracts issued by a financial institution that agrees to pay interest that is linked to the returns of a specified commodity. 

Currency ETFs 

Currency ETFs invest in the currencies of various countries and are typically used by investors to profit from the price movements of a given country versus another country or group of countries. For example, the largest currency ETF, the Invesco DB U.S. Dollar Bullish Fund (UUP), uses futures contracts to profit when the U.S. dollar is stronger in relation to a basket of foreign currencies.

Multi-asset ETFs 

Multi-asset ETFs are exchange-traded funds that invest in more than one asset type, such as a mix of stocks and bonds, generally intended to create a diversified portfolio within a single fund. Many multi-asset ETFs are made up of other ETFs to create one portfolio. 

Alternatives ETFs 

Alternatives ETFs are exchange-traded funds that generally don’t fit into traditional types of ETFs, including with alternative strategies, such as hedging or private equity. These unique funds generally offer investors access to areas of the market that may otherwise not be accessible to them. 

Sustainable ETFs 

Also known as ESG ETFs, sustainable ETFs are exchange-traded funds that typically track the performance of an index of stocks or bonds issued by companies that have certain environmental, social and governance characteristics. The largest sustainable ETF on the market is the iShares ESG Aware MSCI USA ETF (ESGU)

Bottom Line 

There are thousands of ETFs that fall under dozens of different categories. 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. The wide range of ETFs on the market, combined with low expense ratios, makes ETFs a versatile investment for almost any investor.

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