Exchange Traded Fund (ETF) Definition

Learn more about Exchange Traded Funds (ETF)

An exchange-traded fund, or ETF, is a type of investment fund that trades on an exchange like a stock. ETFs are baskets of securities that track a specific index, sector, or asset class. They may also use futures to track a benchmark index or asset. ETFs offer investors a convenient and cost-effective way to gain exposure to a diverse range of assets without having to individually select and purchase individual securities. ETF shares are bought and sold throughout the trading day, similar to stocks, and their prices fluctuate based on supply and demand. Unlike mutual funds, which are priced once a day after the market closes, ETFs offer real-time pricing and intraday trading capabilities. ETFs are generally managed passively, meaning that they track a predetermined benchmark index or asset and do not attempt to actively outperform the market. This passive approach typically results in lower expense ratios compared to actively managed mutual funds. ETFs are a popular investment choice for individuals and institutions due to their diversification benefits, low fees, transparency and tax advantages. They can be used as a core holding in a portfolio, for tactical asset allocation, or to gain exposure to specific sectors or markets.

Related Terms

Benchmark, Asset Allocation, Diversification, Passive Management, Expense Ratio, Tax Efficiency