What Is an ETF? Exchange-Traded Funds, How They Work and Investment Strategies
An ETF (Exchange Traded Fund) is an investment vehicle that tracks an index, commodity, sector or theme and trades on the stock exchange just like a regular stock. ETFs are widely used by both beginners and advanced investors due to their low cost, flexibility and diversification benefits.
This guide explores how ETFs work, their different types, advantages, risks and investment strategies.
⭐ What Is an ETF?
An ETF pools money from investors and buys a basket of assets that mirror a specific index or market segment. Investors can buy or sell ETF shares throughout the trading day.
Key ETF features:
- Trades like a stock
- Low management fees
- Transparent holdings
- Built-in diversification
- Access to global markets
🟥 Types of ETFs
1. Index ETFs
Track major stock indices:
- S&P 500
- Nasdaq 100
- MSCI World
- BIST 30
2. Sector ETFs
Target specific industries:
- Technology
- Energy
- Financials
- Healthcare
3. Commodity ETFs
Gold, silver, oil and metals.
4. Bond ETFs
Government and corporate bonds.
5. Thematic ETFs
Focused on innovation and megatrends:
- Artificial intelligence
- Green energy
- Robotics
- Blockchain
6. Global / Regional ETFs
Exposure to US, Europe, Asia and emerging markets.
⚙️ How ETFs Work
ETF providers (e.g., Vanguard, BlackRock iShares) buy the underlying securities of an index. Investors buying ETF shares indirectly own a piece of this basket.
Working principle:
Investor → ETF provider → Basket of securities (stocks, bonds, commodities)
ETF prices move according to the value of underlying assets.
🧩 ETF vs Individual Stocks
| Feature | Stocks | ETFs |
|---------|--------|------|
| Risk | Company-specific | Diversified |
| Diversification | Low | High |
| Management | Company performance | Index performance |
| Costs | No management fee | Very low expense ratio |
| Volatility | Higher | More stable |
🟦 Advantages of ETFs
- ✔ Low cost
- ✔ Easy diversification
- ✔ Highly liquid
- ✔ Transparent structure
- ✔ Flexible trading
- ✔ Suitable for long-term investing
🟧 Risks of ETFs
- ❗ Market downturns affect all ETF holders
- ❗ Low-liquidity ETFs may have wide spreads
- ❗ Thematic ETFs can be highly volatile
- ❗ Leveraged ETFs carry extreme risk
📊 ETF Investment Strategies
1. Long-Term Passive Investing
S&P 500, MSCI World and similar broad ETFs.
2. Dollar-Cost Averaging (DCA)
Regular contributions reduce emotional risk.
3. Thematic Exposure
Focusing on sectors like AI, renewable energy or biotech.
4. Diversified Portfolio Approach
Example allocation:
- 40% equity ETFs
- 30% global ETFs
- 20% bond ETFs
- 10% gold ETFs
5. Defensive Strategy
Gold ETFs, bond ETFs and low-volatility ETFs.
🎯 Conclusion
ETFs provide simple yet powerful access to diversified investments. Their flexibility, cost efficiency and broad category options make them an essential tool for modern portfolio construction. Whether for passive long-term investing or targeted thematic exposure, ETFs offer scalable solutions for every investor.