Other Types of Securities: ETFs, Bonds, and Derivatives
- Derin Goktepe
- Jul 28, 2025
- 3 min read
Updated: Jun 19
In the previous two posts, we focused on stocks and how they fit into an investment portfolio. But stocks are only one category of financial assets. There are many other instruments—more formally called securities—that investors use. In this post, we’ll look at three of the most common: ETFs, bonds, and derivatives.
What Are ETFs?
An ETF, or Exchange‑Traded Fund, is a fund that acts like a basket of stocks and trades on the open market. The key difference between an ETF and an individual stock is that when you invest in an ETF, you gain exposure to every company inside it.
For example, imagine an ETF that contains Microsoft, Google, and Apple. Buying that ETF means you are investing in all three companies at once through a single purchase.
The main purpose of an ETF is diversification. If you invest only in Apple and the stock drops on a particular day, your investment will drop as well. But if you invest in an ETF that includes Apple, Microsoft, and Google, the gains from the other companies may offset Apple’s losses. This helps smooth out the ups and downs of individual stocks.
In reality, most ETFs contain hundreds or even thousands of stocks. Two of the most widely traded ETFs are SPY and QQQ, which track the S&P 500 and Nasdaq indices. Many investors use them to gain broad exposure to the overall market.
What Are Bonds?
A bond is essentially a loan that you give to a government or corporation. In return, the borrower pays you interest over time and eventually returns the principal amount. It is similar to how a bank gives a loan to a person—except now you are the lender.
Bonds typically offer lower returns than stocks, often around 3–4% annually, but the returns are much more stable. For a government to fail to repay its bonds, there would need to be a major financial crisis or even a government collapse.
Bonds are often used alongside stocks because they can help reduce risk during market downturns. Historically, bonds tended to move in the opposite direction of stocks, meaning they could soften losses when the stock market fell. However, in recent years, this relationship has not always held. Investors now explore other ways to manage risk, which we’ll discuss in future posts.
What Are Derivatives?
A derivative is a financial contract whose value depends on another asset, called the underlying asset. That definition may feel abstract at first, so let’s look at two common types: futures and options.
Futures
Futures are contracts where you agree to buy or sell something at a specific price on a specific date. For example, if I believe crude oil will be $70 per barrel at the end of 2026 and the futures contract for that date is priced at $68, I might buy the contract. If the actual price ends up being higher than $68, I profit from the difference.
Another way to think about it is that by buying the contract, you are agreeing to purchase oil for $68 at that future date, no matter what the market price is.
Options
Options work similarly but with one major difference: with an option, you have the right to buy or sell at a certain price, but you are not required to. This flexibility comes at the cost of a premium you pay upfront.
Options and futures can be powerful tools, but they can also be extremely risky. Some types of options can triple in value within hours, while others can go to zero just as quickly. Many successful long‑term investors never use derivatives at all. You can build a strong portfolio using only stocks or ETFs.
Why This Matters
Understanding ETFs, bonds, and derivatives helps you see how investors manage risk, diversify their portfolios, and express different views about the market. These securities play major roles in how modern financial markets function. Even if you never trade derivatives or buy individual bonds, knowing how they work gives you a clearer picture of what kinds of strategies different market participants follow.
