ETF (Exchange-Traded Fund)
An ETF is an investment fund that trades on stock exchanges like individual stocks, typically tracking an index with lower fees than mutual funds.
Exam Tip
ETFs trade like stocks (intraday). Mutual funds are priced once at market close.
What is an ETF?
An Exchange-Traded Fund (ETF) is a basket of securities that trades on an exchange like a stock. Most ETFs track an index (like the S&P 500) and offer a low-cost way to invest in diversified portfolios.
ETF vs. Mutual Fund
| Feature | ETF | Mutual Fund |
|---|---|---|
| Trading | Throughout the day | Once daily at NAV |
| Pricing | Real-time market price | End-of-day NAV |
| Minimum Investment | Price of 1 share | Often $1,000+ |
| Expense Ratios | Generally lower | Generally higher |
| Tax Efficiency | More efficient | Less efficient |
Types of ETFs
- Index ETFs - Track market indices (most common)
- Sector ETFs - Focus on specific industries
- Bond ETFs - Fixed income investments
- Commodity ETFs - Track commodities like gold
- Leveraged/Inverse ETFs - Amplified or opposite returns (high risk)
Creation/Redemption Process
ETFs use Authorized Participants (APs) to create and redeem shares, which helps keep the market price close to NAV and improves tax efficiency.
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Related Terms
Mutual Fund
SecuritiesA mutual fund is a professionally managed investment vehicle that pools money from multiple investors to purchase a diversified portfolio of securities.
Net Asset Value (NAV)
SecuritiesNAV is the per-share value of a mutual fund or ETF, calculated by dividing total assets minus liabilities by the number of outstanding shares.