An exchange traded fund (ETF) is a type of pooled investment security that operates much like a mutual fund. Typically, ETFs will track a particular index, sector, commodity, or other assets, but unlike mutual funds, ETFs can be purchased or sold on a stock exchange the same way that a regular stock can.
Key Takeaways
- An ETF is a basket of securities that trades on an exchange just like a stock does.
- ETF share prices fluctuate all day as the ETF is bought and sold; this is different from mutual funds, which only trade once a day after the market closes.
- ETFs can contain all types of investments, including stocks, commodities, or bonds; some offer U.S. only holdings, while others are international.
How They Compare to Mutual Funds
Unlike mutual funds, which are priced only at the end of the day based on their net asset value (NAV), ETFs can be traded throughout the day on the stock market. Because they are passively managed and track specific indices, they generally have lower expense ratios than actively managed mutual funds.