Exchange-Traded Fund -ETF

What Is an ETF?

An exchange-traded fund (ETF) is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies. ETFs are in many ways similar to mutual funds; however, they are listed on exchanges and ETF shares trade throughout the day just like an ordinary stock.


Some well-known example is the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index. ETFs can contain many types of investments, including stocks, commodities, bonds, or a mixture of investment types. An exchange-traded fund is marketable security, meaning it has an associated price that allows it to be easily bought and sold.

KEY TAKEAWAYS

  • An exchange-traded fund (ETF) is a basket of securities that trade on an exchange, just like a stock.
  • ETF share prices fluctuate all day as the ETF is bought and sold; this is different from mutual funds that 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.
  • ETFs offer low expense ratios and fewer broker commissions than buying the stocks individually.

An ETF is called an exchange-traded fund since it's traded on an exchange just like stocks. The price of an ETF’s shares will change throughout the trading day as the shares are bought and sold on the market. This is unlike mutual funds, which are not traded on an exchange, and trade only once per day after the markets close.

Types of ETFs

There are various types of ETFs available to investors that can be used for income generation, speculation, price increases, and to hedge or partly offset risk in an investor's portfolio. Below are several examples of the types of ETFs.
  • Bond ETFs might include government bonds, corporate bonds, and state and local bonds—called municipal bonds.
  • Industry ETFs track a particular industry such as technology, banking, or the oil and gas sector.
  • Commodity ETFs invest in commodities including crude oil or gold.
  • Currency ETFs invest in foreign currencies such as the Euro or Canadian dollar.
  • Inverse ETFs attempt to earn gains from stock declines by shorting stocks. Shorting is selling a stock, expecting a decline in value, and repurchasing it at a lower price.
Investors should be aware that many inverse ETFs are Exchange Traded Notes (ETNs) and not true ETFs. An ETN is a bond but trades like a stock and is backed by an issuer like a bank. Be sure to check with your broker to determine if an ETN is a right fit for your portfolio.
In the U.S., most ETFs are set up as open-ended funds and are subject to the Investment Company Act of 1940 except where subsequent rules have modified their regulatory requirements. Open-end funds do not limit the number of investors involved in the product.

How to Buy and Sell ETFs

ETFs trade through online brokers and traditional broker-dealers.Standard brokers are Robo-advisors like Betterment and Wealthfront who make use of ETFs in their investment products.

Real World Examples of ETFs

Below are examples of popular ETFs on the market today. Some ETFs track an index of stocks creating a broad portfolio while others target specific industries.
  • SPDR S&P 500 (SPY): The oldest surviving and most widely known ETF tracks the S&P 500 Index
  • iShares Russell 2000 (IWM): Tracks the Russell 2000 small-cap index
  • Invesco QQQ (QQQ): Indexes the Nasdaq 100, which typically contains technology stocks
  • SPDR Dow Jones Industrial Average (DIA): Represents the 30 stocks of the Dow Jones Industrial Average
  • Sector ETFs: Track individual industries such as oil (OIH), energy (XLE), financial services (XLF), REITs (IYR), Biotech (BBH)
  • Commodity ETFs: Represent commodity markets including crude oil (USO) and natural gas (UNG)
  • Physically-Backed ETFs: The SPDR Gold Shares (GLD) and iShares Silver Trust (SLV) hold physical gold and silver bullion in the fund




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