An Exchange-Traded Fund (ETF) is a security that tracks an index, sector, commodity, or other asset basket and trades on a stock exchange like a stock. It represents a share of a diversified portfolio and is priced and traded throughout the regular market session.
An Exchange-Traded Fund (ETF) is a security that tracks an index, sector, commodity, or other asset basket and trades on a stock exchange like a stock. The fund holds a portfolio of assets and issues shares that represent a portion of that basket.
What it is
ETFs are designed to mirror the performance of a target index or asset group, using either full replication or sampling methods. Shares in an ETF are traded on an exchange throughout the trading day, with intraday price changes based on supply and demand.
How it is used
Index tracking: Many ETFs aim to reproduce the performance of a specific benchmark index.
Diversification: A single ETF can provide exposure to many securities within a target area.
Trading flexibility: ETF shares trade during market hours and can be routed using standard order types through brokers.
Costs and liquidity: ETFs incur an expense ratio and may involve bid-ask spreads; liquidity varies by fund and underlying assets.
Creation and redemption: Authorized participants can create or redeem shares in large blocks, which helps keep the market price near the fund’s net asset value (NAV).
Things to consider
Some ETFs use leverage or inverse exposure, which can magnify gains or losses. Tracking error, replication method, and the fund’s liquidity are also important factors in how closely the ETF matches its target index or asset class.
Example Usage
In practice, an investor may trade ETF shares on an exchange to adjust exposure to a broad market index in response to market conditions.
Related Terms
Mutual Fund · Index Fund · Underlying Index · Expense Ratio · Liquidity · Diversification