ETF (Exchange-Traded Fund)
Definition
An Exchange-Traded Fund (ETF) is a type of investment fund that holds a diversified portfolio of assets and trades on stock exchanges like individual stocks.
Explanation
ETFs combine the diversification of mutual funds with the trading flexibility of stocks. They can track various indexes, sectors, commodities, or investment strategies. ETFs typically have lower expense ratios than actively managed mutual funds and offer tax efficiency.
Popular ETFs include the S&P 500 index ETF (SPY), total market ETFs, sector-specific ETFs, and international ETFs. Investors can buy and sell ETF shares throughout the trading day at market prices.
Example
An investor buys shares of an S&P 500 ETF, gaining exposure to 500 large US companies in a single transaction, with an expense ratio of just 0.03%.