Hedge Index with ETFs

ETFs are useful in protecting index positions. If an investor is long a particular index, they can make an opposing trade to protect their risk. Some indexes have multiple ETFs to track them, so there is much opportunity when it comes to hedging index risk.

Currency ETFs

Currency ETFs are used by investors that are looking to gain exposure to the foreign currency market but would prefer to not enter the futures or forex markets. Currency ETFs aim to replicate price movements of currency in the foreign exchange market. They allow investors to trade a broad currency asset, a regional currency (such as Europe) or even individual country currencies. They allow investors to expose their portfolio to foreign currencies without all of the complications that can come along with them.

Exchange Traded Notes (ETN)

ETN — or Exchange Traded Note — is an investment that is issued by banks as senior debt notes. When purchasing an ETN, the investor is buying a debt asset similar to a bond, but the terms of the debt contract are determined by the structure of the note. The products are considered relatively secure, as they are backed by banks with high credit rankings.

Invest in Bond ETFs

Much like other ETFs, bond ETFs try and track a correlating index or underlaying investment product. While bonds themselves are not very liquid, bond ETFs need to be liquid and available in a secondary market. To work around this problem, a bond ETF usually includes only the largest and most liquid bonds in the underlying index. The bond market is usually less volatile than stocks, and is more of a safe-haven investment in an uncertain economy.

Invest in Foreign Markets with ETFs

Foreign market ETFs can simplify international investing. Funds offered include foreign market ETFs, emerging market ETFs, broad foreign funds and funds that track individual countries such as Brazil and China. Investing in a foreign market ETF also removes some of the complications that can come with foreign investing, such as currency adjustments, foreign tax laws and general overseas challenges.

Invest in Commodities without actually investing in comodities

Commodity ETFs allow investors to participate in the commodity markets and also diversify their investment portfolio. Commodity ETFs can come in several forms, but most were created to mirror the returns of commodities by investing in the commodity futures markets. These ETFs are buy futures contracts, based on the amount of funds they receive from investors. Some commodity ETFs focus on commodity sectors and only buy futures contracts in that area – oil, agriculture or gold. As an overall investment to diversify your portfolio, investors will probably want to hold a Commodity ETF that holds a basket of commodities.

Gain Exposure to an Industry

Some investors are looking for access to specific industries rather than entire markets. Most major market sectors have a correlating index – for example, energy and gold. ETFs help investors access exposure to those particular industries. For example, one can invest in major market sectors like financials, defense or technology rather than the entire market. The goal of an ETF is to mimic the performance of the industry as a whole and stay pegged to the performance of that industry. Industry ETFs usually contain the same securities of that correlating index, and are traded as a single “block” trade.