An ETF, or exchange-traded fund, is a type of investment vehicle that holds a basket of assets, such as stocks, bonds, commodities, or a combination of these. ETFs are traded on stock exchanges, just like stocks, which means their price fluctuates throughout the day based on supply and demand. ETFs are created and managed by fund companies and typically track the performance of an underlying index, such as the S&P 500.
When you buy shares of an ETF, you are essentially buying a small piece of the underlying assets that the ETF holds. The value of your ETF shares will rise or fall depending on the performance of the underlying assets. For example, if the ETF holds stocks and those stocks go up in value, the ETF’s value will also go up. Conversely, if the underlying assets go down in value, the ETF’s value will also decrease.
ETFs offer investors a way to diversify their portfolio and gain exposure to a specific market or sector with a single investment. They also typically have lower expense ratios than actively-managed mutual funds.
ETFs can be bought and sold on the stock exchange just like stocks, and the shares can be held in a brokerage account. ETFs may also be bought or sold through a financial advisor.