What are ETFs? | Robinhood (2024)

A sector ETF is an investment vehicle that invests specifically in the stocks and securities of a particular industry or sector (a large grouping of companies with similar business activities). For example, a sector ETF may track a representative basket of stocks in the technology sector, or the healthcare sector.

Holdings are the contents of the ETF, they may encompass a wide range of investment products including stocks, bonds, mutual funds, options, and futures. The number and types of holdings within an ETF contribute to its degree of diversification.

Some common ETFs include:

• Broad index-based ETFs track popular indexes like the S&P 500 stock index, which is made up of 500 of the largest publicly traded US companies based on their value by market capitalization. Index ETFs can track various indices.
• Sector or niche ETFs: track a more narrow part of the market such as a certain market segment, These types of ETFs can represent unique market segments like commodities (e.g., gold, oil), or they can specialize in a narrower segment of a larger class of assets (e.g., small companies, foreign companies, or cybersecurity companies). Investors in these ETFs are typically exposed to additional political, currency, and market risks.
• Actively managed ETFs: are managed by a team of investment managers responsible for researching and making decisions about the ETF’s portfolio allocation.

Both contain the word “fund,” but they’re not exactly the same. Mutual funds and ETFs similarly can provide access or exposure to a wider range of investments in one, bundled, fund. Mutual funds also come in two primary types (open-ended and close-ended), which can each offer different characteristics. While ETFs and mutual funds both can provide investment diversification depending on what they are invested in and an investors’ circ*mstances, they differ in their structure, their benefits, and their risks.

Here are a couple of differences:

1. An ETF is traded throughout the day on exchanges, like a stock. But mutual funds (like open-ended mutual funds) are only priced once daily, at the end of a trading day, and can only be redeemed after that price is determined daily once trading ends.

2. ETFs are often designed to passively track a particular industry, index, or bundle of securities, so management fees can sometimes be lower (but fees will vary between ETFs).

ETFs provide a variety of benefits relative to other types of funds, such as mutual funds. Keep in mind that despite these advantages, all ETFs carry risk based on the underlying investments they hold.

• “Intraday” trading: Just like a stock, ETF prices can move during the day and ETFs can be bought and sold during trading hours. For example, a day trader may buy an ETF in the morning, sell it at lunch, and re-buy it in the afternoon. An open-ended mutual fund, on the other hand, can only be redeemed once a day, after the market closes, at the fund’s end-of-day price.
• Lower fees: Mutual funds may be actively managed by a fund manager, and in that case they typically charge higher fees for this service. But since ETFs often passively track the movements of an index or sector without as much active human direction, they typically don’t charge as much of a management fee. Some ETFs are actively managed however, and fees will vary between different ETFs and funds.
• Diversification: The wide variety of ETFs available can make it easier to provide diversification to your portfolio. Different and increasingly niche ETFs specialize in certain sectors, areas, and securities that can help balance out your other investments.

Investing is serious, no matter the type of investment — stocks, commodities, mutual funds, or ETFs. In addition to an ETF’s benefits, there are also some disadvantages to keep in mind. Like any investment, ETFs carry risk, whether that’s the risk generally associated with investing in the financial markets, or or the specific risk of the companies in which it’s invested.

Here are some key disadvantages to keep in mind:

• Variety: While ETFs may help diversify a portfolio, they aren’t necessarily diverse on their own. Some ETFs provide access to a wide variety of stocks within a specific region, sector, or topic, but not all do. Make sure you’re aware of exactly what the ETF in which you’re investing includes and whether that actually diversifies your portfolio, if that’s what you’re aiming for.
• Market instability: Over the last decade, the growing popularity of ETFs has resulted in a surge of funds tracking various indices or industries. As a result, some research suggests that market volatility can be amplified because of the algorithm-driven investments by some of the funds.
• Tradeability: ETFs can trade throughout the day like a stock, but that doesn’t mean they’re all necessarily easy to trade. Some ETFs that focus on more niche or obscure sectors may have relatively few buyers and sellers, making it harder to trade your ETF shares quickly at a price you want.
• Leveraged, Inverse and Volatility ETFs: One could be structured to track the broader market, but it might be leveraged so that it rises 3x what the index did — remember though, that also means it falls by three times the amount when markets turn down. These risky, leveraged or inverse ETFs are generally used by short-term traders.

Actively managed funds are managed by a team of investment managers responsible for researching and making decisions about the fund’’s portfolio allocation.

Passively managed funds aim to replicate a specific benchmark or index, in order to track that benchmark or index’s performance.

The 30-day yield is based on a formula mandated by the Securities and Exchange Commission (SEC) that calculates a fund's hypothetical annualized income, as a percentage of its assets. It does not take into account the effect of changing share prices on the total return.

The 30-day yield is calculated by taking the fund's interest and/or dividend earnings for the most recent month and dividing by the average number of shares outstanding for the month times the highest share offer price on the last day of the month.

This hypothetical income will differ (at times, significantly) from the fund's actual experience; as a result, income distributions from the fund may be higher or lower than implied by the SEC yield.

The expense ratio is the amount that an investment company charges investors to manage an investment portfolio, a mutual fund, or an exchange-traded fund (ETF). The ratio represents all of the management fees and operating costs of the fund.There are two types of expense ratios: Gross expense ratio and net expense ratio. The main difference between these two is that the gross expense ratio does not include any fee waiver or expense reimbursem*nt agreements that may be in effect. These are fees charged by the fund provider, not by Robinhood.

An annualized rate of return is calculated as the equivalent annual return an investor receives over a given period. The rate of return looks at gains or losses on investments over varying periods of time, while the annualized rate looks at the returns on a yearly basis including compounding and fees.

Simply tap on the name of the ETF to get to it’s detail page where you will find a link to the company prospectus which will detail all of the fund’s holdings as of a specific date.