Definition
An Exchange-Traded Fund pools capital from many investors to hold an underlying portfolio — commonly tracking a stock index (like the S&P 500), a sector, a commodity, or a fixed-income basket. Shares of the ETF trade continuously on stock exchanges throughout the trading day, unlike mutual funds which settle only at the closing NAV. ETFs typically have lower expense ratios than actively managed mutual funds and are tax-efficient in most jurisdictions due to their in-kind creation/redemption mechanism, which minimizes capital gains distributions to shareholders.
Example
The SPY ETF (SPDR S&P 500 ETF Trust) tracks the S&P 500 index. Buying one share gives you fractional ownership in all 500 constituent companies, weighted by market cap.
Frequently Asked Questions
How is an ETF different from a mutual fund?
ETFs trade continuously on exchanges at market prices during the trading day. Mutual funds price and settle only once daily at NAV. ETFs also tend to have lower expense ratios and better tax efficiency.
Are ETFs safer than individual stocks?
ETFs are diversified across many holdings, which reduces single-stock risk. However, sector or thematic ETFs can still be volatile, and leveraged/inverse ETFs carry substantial additional risk.
What is the expense ratio of an ETF?
The annual fee charged by the fund manager, expressed as a percentage of assets. Low-cost index ETFs are typically 0.03–0.10%; niche or actively managed ETFs can exceed 0.75%.