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Exchange traded Fund

An exchange traded fund (ETF) is an investment fund that invests in a basket of stocks, bonds, or other assets. ETFs are traded on a stock exchange, just like stocks. Investors are drawn to ETFs because of their low price, tax efficiency and ease of trading. ETFs seek to provide the performance of a specified index, such as the S&P 500, and typically have low fees. Like mutual funds, ETFs offer investors diversified exposure to a portfolio of securities, such as stocks, bonds, commodities and real estate.

What are the benefits of ETFs?

ETFs cost significantly less than comparable active mutual funds — and that savings can add up over time. Other benefits include:

  • 1

    Access and liquidity. Because ETFs are traded on stock exchanges, they are easily bought or sold.

  • 2

    Transparency. Just like mutual funds, ETFs report performance quarterly and fees daily.

  • 3

    Diversification. ETFs provide access to a wide range of investment options, covering a broad range of asset classes, sectors and geographies. They also make it easy to select specific themes or investment styles.

What are the types of ETFs?

Most ETFs seek to track an index.
Stock ETFs track a certain stock market index, such as the S&P 500 or NASDAQ. Bond ETFs offer exposure to a wide selection of fixed income instruments. Sector and industry ETFs invest in a particular industry, such as technology, healthcare or financials. Commodity ETFs track the price of a commodity, such as oil, gold or wheat. Style ETFs are devoted to an investment style or market capitalization focus, such as large-cap value or small-cap growth. Alternative ETFs offer exposure to the alternatives asset class and invest in strategies such as real estate, hedge funds and private equity. Foreign market ETFs follow non-U.S. markets, such as the United Kingdom’s FTSE 100 Index or Japan’s Nikkei Index. Actively managed ETFs aim to provide a certain outcome, like maximize income or outperform an index, while most ETFs are designed to track an index.