ETF Definition
An Exchange Traded Fund (ETF) is a type of investment fund and exchange-traded product, which is bought and sold on a securities exchange market. An ETF holds assets such as stocks, commodities, or bonds, and typically aims to track the performance of a specific index.
ETF Key Points
- ETFs are investment funds that are traded on a stock exchange.
- They hold assets such as stocks, commodities, and bonds.
- ETFs aim to track the performance of a specific index.
- They combine the diversification benefits of mutual funds with the trading flexibility of stocks.
- ETFs can be bought and sold throughout the trading day at market prices, unlike mutual funds which are traded at end-of-day net asset value.
What is an ETF?
An ETF, or Exchange Traded Fund, mirrors the performance of a particular index or market benchmark. It aims to achieve the same return as the market it’s tracking, less any operating expenses. For example, an ETF that tracks the S&P 500 index would aim to mirror the performance of that index.
How Does an ETF Work?
An ETF works by owning underlying assets and dividing ownership of those assets into shares. The shareholders indirectly own these assets, although they do not have direct claim to the underlying investments in the fund. Instead, they have a contractual right to a portion of the fund’s value, but cannot sell the assets owned by the fund.
Who Uses ETFs?
ETFs are used by various types of investors including individuals, institutions, and financial advisors. They are popular for their ability to offer broad diversification, lower cost compared to many mutual funds, transparency of holdings, and ability to be traded throughout the day.
Where Can ETFs Be Traded?
ETFs can be bought or sold on a securities exchange market, much like individual stocks. They can be traded throughout the trading day at fluctuating prices, unlike mutual funds which only trade once a day at the closing price.
Why Choose ETFs?
Investors might choose ETFs because they offer a way to gain broad exposure to entire markets, sectors, regions, or asset classes. They also have lower expense ratios than many mutual funds, and because they are traded like stocks, they offer greater flexibility and liquidity.
When Are ETFs Used?
ETFs can be used whenever an investor wants exposure to a specific index or asset class without purchasing each individual security. They are also used when investors want to quickly enter or exit markets, hedge risks, or gain exposure to sectors or regions that may be underrepresented in their portfolio.
