ETF stands for “exchange-traded fund.” It is an investment fund that holds a basket of assets — such as stocks, bonds or commodities — and trades on a stock exchange throughout the day, much like an individual share.
What does ETF mean?
An exchange-traded fund pools money from many investors and uses it to hold a collection of underlying assets. Buying a single ETF share gives an investor a small stake in everything the fund holds, which can be dozens or even hundreds of individual securities. This is why ETFs are often described as a way to gain diversified exposure in one product.
How does an ETF work?
The defining feature is in the name: ETFs are traded on exchanges. Their shares can be bought and sold throughout the trading day at prices that move with supply, demand and the value of the underlying holdings. That makes them behave, from the investor’s point of view, a lot like buying or selling a stock.
How is an ETF different from a mutual fund?
ETFs and mutual funds both pool money to invest in a spread of assets, but they differ in how they are traded. A mutual fund is typically priced once per day after the market closes, and orders settle at that single price. An ETF, by contrast, trades continuously during market hours at fluctuating prices.
| Feature | ETF | Mutual fund |
|---|---|---|
| Trading | Throughout the day on an exchange | Once per day after close |
| Pricing | Changes during the session | Set once daily |
| Holdings | Basket of assets | Basket of assets |
What do ETFs invest in?
ETFs can hold a wide range of asset classes, including stocks, bonds, commodities and foreign currencies. Many are designed to track an index, aiming to mirror the performance of a benchmark such as the S&P 500, the Nasdaq, the Dow Jones Industrial Average or the Russell 2000. Others are actively managed, with a manager choosing holdings in pursuit of a particular goal.
Why do investors use ETFs?
The main appeals are diversification and flexibility. Because a single ETF can spread money across many holdings, it can reduce the impact of any one position performing poorly. Because it trades like a stock, it can be bought or sold easily during market hours. Together these traits have made ETFs a popular building block for both new and experienced investors.
As with any investment, an ETF can gain or lose value, and it may occasionally trade at a small premium or discount to the value of its underlying holdings. This article explains what the term means and how the product works; it is general information and not personalised financial advice.
Frequently Asked Questions
What does ETF stand for?
It stands for exchange-traded fund, an investment fund traded on a stock exchange.
How is an ETF different from a mutual fund?
ETF shares trade on an exchange throughout the day, while mutual fund shares are usually priced once daily after markets close.
What can an ETF hold?
An ETF can hold stocks, bonds, commodities, currencies or a mix of assets.
Do ETFs track indexes?
Many do, tracking benchmarks such as the S&P 500, Nasdaq or Russell 2000, though some are actively managed.
Are ETFs risky?
Like any investment, ETFs can rise or fall in value; this article is general information, not financial advice.