Leveraged ETFs aim to deliver a multiple (e.g., 2x or 3x) of the daily return of an underlying index, while inverse ETFs aim to provide the opposite performance of the index. They achieve this through the use of derivatives, such as futures contracts or swaps. While these ETFs can be useful for short-term trading or hedging strategies, they carry significant risks. Daily resetting of leverage causes compounding effects, which can lead to substantial deviations from the expected performance over longer periods. This makes leveraged and inverse ETFs unsuitable for long-term investors. Additionally, the use of derivatives exposes investors to counterparty risk and market volatility, increasing the potential for significant losses.

Tracking error measures how closely an ETF’s performance mirrors the performance of its underlying index. It is calculated as the standard deviation of the difference between the ETF's returns and the index returns over a specific period. A lower tracking error indicates that the ETF is accurately replicating its benchmark, while a higher tracking error suggests inefficiencies. Factors contributing to tracking error include expense ratios, trading costs, dividend reinvestments, and imperfect replication methods (e.g., sampling instead of full replication). High tracking errors can negatively impact investors who rely on ETFs for precise index exposure, making it important to review historical tracking error before investing.

ETFs allow investors to gain targeted exposure to specific sectors (e.g., technology, healthcare), investment themes (e.g., clean energy, AI), or regions (e.g., Asia-Pacific, emerging markets) through a single product. Sector-specific ETFs track indices composed of companies within a particular industry, enabling investors to capitalize on industry trends or hedge against sector-specific risks. Thematic ETFs focus on emerging trends or innovations, such as blockchain or electric vehicles, often appealing to long-term growth investors. Regional ETFs invest in markets outside the investor’s home country, providing diversification and access to international growth opportunities. These ETFs are ideal for creating a diversified and tailored portfolio.

ETF liquidity is influenced by both the liquidity of the ETF itself (secondary market) and the liquidity of its underlying assets (primary market). While high trading volume typically ensures tighter bid-ask spreads and lower transaction costs, less frequently traded ETFs may have wider spreads, increasing the cost of entry or exit. However, ETF liquidity is also backed by the underlying assets, meaning authorized participants (APs) can create or redeem shares to maintain market efficiency. This mechanism helps prevent ETFs from trading at significant premiums or discounts to their NAV. Investors should consider both trading volume and the liquidity of the underlying assets when selecting an ETF, particularly for niche or thinly traded funds.