A bank exchange traded fund, or bank ETF, tracks the stock of a given bank over a period of time. These investment opportunities may not be available to all investors. Many ETFs are accessible only to institutional investors, which include investment groups or individuals with over $100M in the market at a given time. As such, you will need to consult with an institutional investment group to purchase a bank ETF. Taking this step can be beneficial because bank ETFs pose very high potential returns and are highly liquid, meaning they can quickly be sold for cash.

Understanding an ETF

An ETF is basically a group of investments bundled into one. ETFs can be packaged by brokerage houses or track a given currency. ETFs often simplify the investment process because an investor does not need to track each individual stock. Instead, an investor can watch an ETFs value over time and decide to purchase the ETF if it proves to be a wise investment. ETFs trade daily at the value of the sum of their parts. Watching an ETFs value basically means watching multiple stocks with one, simplified index.

Understanding a Bank ETF

A bank ETF tracks the portfolio of stocks held by a bank. Many people forget that banks are not just institutions that hold and lend money. In fact, banks trade huge amounts of stock, currency and even leveraged debt on the market daily. Banks are the epicenter of most trading indexes. They are the biggest investors in the market, and the performance bank trading affects the entire economy. Banks typically employ extremely successful analysts to choose their investments. By purchasing a bank ETF, you can borrow the expertise of these analysts. However, banks do tend to be high risk investors, so you should be prepared for this risk when you piggy back of a bank.

Two Types of Bank ETFs

There are two primary types of banks, and therefore two primary types of bank ETFs. The first type is a community bank. This type of bank is largely local, does not invest in complicated leveraged debt, and does not rely on a large amount of credit card processing. The second type of bank is a global bank. This includes any bank that has international locations, is in the top 50 banks according to asset base, or specializes in credit card lending and processing. Community bank ETFs are lower risk, and global bank ETFs are higher risk investments.

Selecting a Bank ETF

The best way to see if a bank ETF will be right for you is to engage in mock investment. To do this, start a spread sheet tracking an imaginary sum you would potentially invest in a bank ETF. Track the performance of the ETF over time, and see what your earnings would have been. It is best to track for at least 6 months to a year because bank ETFs are very volatile and may not show a trend in a short period of time. Today, many investors will simply take the advice of an investment consultant to purchase a bank ETF.

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