ETF
Back to GlossaryDefinition
A type of security that involves a collection of securities (e.g. stocks) that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies.
Summary
An Exchange-Traded Fund (ETF) is an investment fund that trades on stock exchanges like individual stocks, but holds a diversified portfolio of assets such as stocks, bonds, or commodities. ETFs combine the diversification benefits of mutual funds with the trading flexibility of stocks, allowing investors to buy and sell shares throughout the trading day at market prices. They typically track an index, sector, or investment theme and offer lower fees than actively managed funds.
Usage Context
Understanding ETFs is crucial when studying portfolio construction, investment strategies, risk management, and comparing different investment vehicles. Essential for topics covering passive vs. active investing, cost-effective diversification, and modern investment options.
Common Confusions
- Thinking ETFs and mutual funds have the same trading restrictions
- Confusing ETF share price with the underlying asset values
- Believing all ETFs are passively managed index funds
- Assuming ETFs don't have any fees
- Thinking ETF dividends work the same as individual stock dividends
