Exchange-Traded Fund

An exchange-traded fund (ETF) represents a type of investment fund and exchange-traded product that are commonly traded on stock exchanges.

In many ways, ETFs are similar in nature to mutual funds, except that ETFs are bought and sold over exchanges.

Most tradable ETFs track a specific index, though these can be expanded to include most investment products. This most commonly mirrors a stock or bond index.

In recent years, the popularity of ETFs has grown and are now seen as an attractive investment due to its low cost, efficiency, and stock-like features.

ETFs have also become a primary offering at many retail brokerages. These instruments are quite flexible and grant traders enhanced exposure to a wide range of asset classes.

Understanding ETFs

Generally speaking, an ETF is a type of investment fund. Within this fund is a basket of assets, be it stocks, bonds, commodities, etc.

To understand an ETF is to understand the overall ownership or exposure to these assets, which are divided into shares that are held by shareholders.

An example of this is an ETF tracking major stock indices such as the S&P 500 index.

Shares of the ETF constitute exposure to the entire stock index, which itself is a composite of 500 firms traded on the New York Stock Exchange (NYSE).

Other common ETFs include precious metals funds such as gold or silver, which give investors exposure to these assets without owning physical metals.

The details of the structure of ETFs also vary by country or jurisdiction. Shareholders of ETFs are entitled to a share of the profits, such as interest or dividends.

ETFs can be thought of as similar to traditional mutual funds, except that shares in an ETF can be bought and sold throughout the day like stocks on a stock exchange through a broker.

Unlike traditional mutual funds, however ETFs do not sell or redeem their individual shares at net asset value (NAV).