EXCHANGE TRADED FUND
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 market hours at market prices. They typically track an index, sector, commodity, or other asset baskets and usually have lower fees than actively managed mutual funds.
Usage Context
Understanding ETFs is crucial when learning about modern portfolio theory, investment diversification strategies, passive vs. active investing, and building cost-effective investment portfolios. This concept is fundamental to personal finance, retirement planning, and understanding how individual investors can access broad market exposure.
Common Confusions
- Thinking ETFs are the same as mutual funds in terms of trading flexibility
- Assuming all ETFs are passively managed index funds
- Believing ETFs eliminate all investment risk
- Confusing ETF share price with net asset value (NAV)
- Thinking ETFs always outperform individual stocks
