ETF (Exchange-Traded Fund)
An ETF is a basket of securities — stocks, bonds, or other assets — that trades on a stock exchange like a single share. ETFs combine the diversification of a mutual fund with the flexibility of stock trading and typically have very low expense ratios.
The most common ETFs track a market index (S&P 500, total market, international). An S&P 500 ETF, for example, holds all 500 stocks in the index at their weighted proportions. When you buy one share, you get proportional exposure to all 500 companies.
Key advantages over actively managed funds: lower costs (typical ETF expense ratio: 0.03–0.20%), tax efficiency (ETFs rarely distribute capital gains), intraday liquidity (tradeable like stocks), and transparency (holdings disclosed daily).
Popular ETFs include: VTI (Vanguard Total Stock Market), VOO (Vanguard S&P 500), BND (Vanguard Total Bond Market), VEA (developed international), and VWO (emerging markets). A three-fund portfolio of these covers nearly the entire global investable market.
Related terms
- Index Fund
- An index fund is a portfolio of stocks or bonds designed to replicate the performance of a market index, such as the S&P 500. Index funds have lower fees than actively managed funds because no stock-picking is required.
- Expense Ratio
- An expense ratio is the annual fee a fund charges investors, expressed as a percentage of assets under management. It is deducted automatically from the fund's returns. Lower is almost always better.
- Diversification
- Diversification is the practice of spreading investments across different assets, sectors, or geographies to reduce risk. A diversified portfolio is less volatile than any single holding because losses in one area are offset by gains in others.
- Mutual Fund
- A mutual fund pools money from many investors to buy a diversified portfolio of securities. Unlike ETFs, mutual funds are priced once daily after market close. They come in two types: actively managed (a manager selects securities) and passively managed index funds.