Exchange-Traded Fund (ETF)
BeginnerAlso known as: ETF An exchange-traded fund (ETF) is an investment fund that holds a basket of assets, such as shares or bonds, and whose units trade on a stock exchange like ordinary shares. An ETF combines features of a mutual fund and a share. Like a mutual fund, it pools investors' money into a diversified portfolio. Like a share, it can be bought and sold throughout the trading day on an exchange at market prices. Most ETFs are designed to track an index, such as a broad stock market index, a bond index or a commodity price. For example, an ETF tracking an index of the largest 500 US companies holds shares in those companies in proportion to the index, so its value rises and falls with the index. ETFs are popular because they are usually low-cost, easy to trade, transparent about their holdings and offer instant diversification. Investors can build a broad portfolio with just a few ETFs covering different asset classes and regions. There are some points to watch. Investors pay the bid-ask spread and any brokerage fees when trading. Some ETFs are complex, using borrowing or derivatives to multiply returns, and are designed for short-term traders rather than long-term investors. Checking what an ETF holds and how it works is important before investing.
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