What Is an Exchange-Traded Fund (ETF)?
An exchange-traded fund (ETF) is a type of pooled investment security that operates much like a mutual fund. Typically, ETFs will track a particular index, sector, commodity, or other assets, but unlike mutual funds, ETFs can be purchased or sold on a stock exchange the same way a regular stock can. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies.
The first ETF was the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index and remains an actively traded ETF today.
KEY TAKEAWAYS
- An exchange-traded fund (ETF) is a basket of securities traded on an exchange, just like a stock.
- ETF share prices fluctuate all day as the ETF is bought and sold; this is different from mutual funds, which only trade once a day after the market closes.1
- ETFs can contain all investments, including stocks, commodities, or bonds; some offer U.S.-only holdings, while others are international.
- ETFs offer low expense ratios and fewer broker commissions than buying the stocks individually.
Understanding Exchange-Traded Funds (ETFs)
An ETF is an exchange-traded fund because it’s traded on an exchange like stocks. The price of an ETF’s shares will change throughout the trading day as the shares are bought and sold on the market. This is unlike mutual funds, which are not traded on an exchange and trade only once per day after the markets close. Additionally, ETFs tend to be more cost-effective and more liquid compared to mutual funds.