An ETF, or exchange-traded fund, has become one of the most popular investment vehicles, and for good reason: it combines the diversification of a fund with the tradability of a stock, often at low cost. Understanding what it is clears up a common source of confusion for new investors.
An ETF holds a basket of investments, often the securities in an index, so buying one share gives you a slice of many holdings at once, instant diversification in a single purchase. Many ETFs are passively managed to track an index at low cost, though active ETFs exist too. In that sense an ETF is a cousin of the index mutual fund, packaged differently.
The key difference is how it trades. A mutual fund is bought and sold once a day at a price set after the market closes. An ETF trades throughout the day on an exchange, like a stock, at prices that move with the market. ETFs also tend to have low expense ratios and, in many cases, certain tax-efficiency advantages over comparable mutual funds, though the specifics vary.
Because they are diversified, low-cost, and easy to buy, ETFs are widely used as building blocks of a portfolio, one ETF for broad stock exposure, another for bonds, and so on, assembled to match an asset allocation. As with any investment, the right ones depend on your goals and the overall plan, and cost and what the fund actually holds matter more than popularity. This is general information, not a recommendation.
Diversification you can trade like a share.
This is general educational information, not personalized investment, tax, or legal advice. Consult a qualified professional about your situation.