This is the second part in the ETF series. Learn here why I think ETFs are probably for you.

It can be overwhelming to look through the hundreds of ETFs offered in the market today. That's why I have compiled a list of categories of ETFs to help break them down into digestible areas.

Index
Funds that track a specific index
Examples: S&P 500 (SPY), Russell 2000 (IWM), Dow Jones Industrial Average (DIA)

Sector focused
Funds that track a specific industry or sector
Examples: Consumer Discretionary (XLY), Consumer Staples (XLP), Energy (XLE), Financials (XLF), Healthcare (XLV), Industrials (XLI), Materials, (XLB), Real Estate (XLRE), Technology (XLK), Utilities (XLU)

Factor focused
Funds that target a specific characteristic in the market
Examples: Momentum (MTUM), Volatility (VXX), Size (SIZE), Quality (QUAL)

Factor investing has increased in popularity dramatically over the last few years. Institutional investors have used factor investing for a while, but this is generally a more advanced strategy that I would not recommend to the average passive investor.

Thematic
Funds that target a specific theme across different sectors and factors
Examples: Big Data (BIGD), E-Commerce (IBUY), Health & Wellness (BFIT), Millennials (MILN)

Thematic funds are a fun way to invest, especially beginners. If you're like me (and you've watched Terminator a few too many times), you might pick a Robotics-themed fund like ROBO or BOTZ.

Geographic
You can find ETFs that track just about any country, but the most common are regional:
USA, Europe, Asia, Emerging Markets
Examples: USA (SPY), Europe (IEUR), Asia Pacific (VPL), Emerging Markets (EEM), Total World (VT)

Growth
Funds that target companies that are expected to grow at a rate faster than average
Examples: IWF

Value
Funds that target companies that are potentially mis-priced or seen as undervalued
Examples: IWD

Size
Large-cap: Think of these as funds that are made up of the big large companies you've heard of (such as Apple, Exxon, or Johnson & Johnson)
Examples: SPY, VONV, NOBL

Small/Mid-cap: Think of these as funds made up of smaller companies that are not as well established as the Large-cap
Examples: IJR, IWO

Advantages & disadvantages of Large and Smid-cap:
Large cap funds tend to perform better in a low-performing or declining market. These companies are seen as "safer" investments, so investors tend to flock to safety during times of uncertainty.

Small cap funds tend to perform better in a high-performing market. Smaller companies can typically grow much faster than larger companies (because they have much more room to go), so when people have a lot of confidence in the market, they tend to flock to growth companies.

ETFs are a crucial part of a balanced portfolio. They are great tools to gain diversification and to reduce stock-specific risk. I personally like to use these funds as a way to get exposure to a certain area or sector that I favor in the near future. For example, I tend to trade into a Utilities ETF when I see skittishness in the broader market—such as when a certain leader of the free world makes playground-level threats to a certain unstable country.... For the beginners, put this knowledge to work by finding a sector you like in the long term.