An ETF, or exchange-traded fund, is an investment fund that holds a collection of assets such as stocks, bonds, commodities, or other securities. It combines features of both stocks and mutual funds. Like a stock, an ETF can be bought or sold throughout the trading day on an exchange, and its price fluctuates during market hours. Like a mutual fund, it pools together many individual investments to provide diversification for the investor. Key characteristics of ETFs include:
- Diversification: By investing in an ETF, you gain exposure to a wide range of underlying assets in a single trade, which spreads risk compared to investing in individual stocks or bonds.
- Cost efficiency: ETFs generally have lower expense ratios and fewer brokerage commissions than buying many individual stocks or mutual funds.
- Liquidity and flexibility: ETFs trade on stock exchanges just like individual stocks, allowing you to buy or sell shares anytime during market hours.
- Transparency: ETFs usually track an index or a specific investment strategy, such as a sector of the market or a type of bond.
- Tax efficiency: ETFs can be more tax efficient compared to some mutual funds.
ETFs are managed either passively, to track an index closely, or actively, where managers try to outperform benchmarks. They provide an affordable, flexible way to build a diversified investment portfolio. In summary, an ETF is a basket of securities traded on an exchange, offering investors an efficient way to invest in multiple assets with the ease and flexibility of trading a single stock. This makes ETFs popular for income generation, speculation, or portfolio diversification. The underlying assets are owned by the fund, and investors own shares of the ETF itself, not the individual investments directly. This explanation is based on multiple financial sources including Investopedia, Charles Schwab, Fidelity, and others.
