Exchange-Traded Fund (ETF)
Quick Definition
A basket of securities that trades on an exchange like a stock, offering diversification with the flexibility of intraday trading.
What Is Exchange-Traded Fund (ETF)?
An Exchange-Traded Fund (ETF) is an investment fund that holds a collection of assets (stocks, bonds, commodities) and trades on stock exchanges like individual stocks.
Key Features:
- Intraday Trading: Buy/sell anytime during market hours
- Diversification: One purchase = exposure to many securities
- Low Cost: Average expense ratio of 0.20% vs 0.50%+ for mutual funds
- Tax Efficient: In-kind creation/redemption reduces capital gains
- Transparency: Holdings disclosed daily
Types of ETFs:
- Index ETFs: Track market indices (SPY, QQQ, VTI)
- Sector ETFs: Focus on specific industries (XLF, XLK)
- Bond ETFs: Fixed income exposure (BND, AGG)
- Commodity ETFs: Gold, oil, etc. (GLD, USO)
- Thematic ETFs: Specific trends (ARKK, ICLN)
ETF vs. Mutual Fund:
| Feature | ETF | Mutual Fund |
|---|---|---|
| Trading | Intraday | End of day |
| Minimum | 1 share | Often $1,000+ |
| Expense Ratio | Lower | Higher |
| Tax Efficiency | Higher | Lower |
Popular ETFs:
- SPY: S&P 500 Index
- QQQ: Nasdaq 100
- VTI: Total US Stock Market
- BND: Total Bond Market
Exchange-Traded Fund (ETF) Example
- 1SPY holds all 500 S&P companies in one fund
- 2VTI provides exposure to 4,000+ US stocks
Related Terms
Index Fund
A mutual fund or ETF designed to track the performance of a specific market index by holding the same securities in the same proportions.
Mutual Fund
A professionally managed investment pool that combines money from many investors to buy a diversified portfolio of securities.
Expense Ratio
The annual fee charged by a fund as a percentage of assets under management, covering operating costs like management, administration, and marketing.
NAV (Net Asset Value)
The per-share value of a fund calculated by subtracting total liabilities from total assets and dividing by the number of outstanding shares.
Vanguard
The world's largest mutual fund company, founded by John Bogle in 1975, pioneering low-cost index investing with a unique investor-owned structure.
Index Investing
A passive strategy that aims to match market returns by holding all securities in a market index in proportion to their weights.
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