Exchange Traded Fund (ETF)
What Is an Exchange Traded Fund (ETF)?
An exchange traded fund (ETF) is an investment fund that holds a collection of assets such as stocks, bonds, or commodities and trades on a stock exchange like an individual stock.
ETFs allow investors to gain diversified exposure to multiple securities through a single investment.
Why It Matters
ETFs combine diversification with trading flexibility. Because they trade on exchanges throughout the day, investors can buy and sell ETF shares at market prices during trading hours.
ETFs have become widely used due to their low costs, transparency, and flexibility.
How an ETF Works
ETFs track a specific index, sector, asset class, or investment strategy.
Investors buy ETF shares through brokerage accounts. The price of the ETF fluctuates throughout the trading day based on supply and demand.
ETFs may invest in:
- stocks
- bonds
- commodities
- real estate
- market indexes
Example
An investor purchases shares of an ETF that tracks the total U.S. stock market, gaining exposure to thousands of companies through one fund.
ETF vs Mutual Fund
- An ETF trades on exchanges throughout the day.
- A mutual fund typically executes trades once daily at its net asset value.
FAQs About ETFs
Are ETFs diversified?
Many ETFs hold multiple securities, providing diversification.
Do ETFs charge fees?
Yes. Most charge a small expense ratio.
Can ETFs track different markets?
Yes. ETFs may track stocks, bonds, commodities, or specific sectors.
Related Terms
