Glossary
Exchange-traded fund (ETF)
A fund that holds a basket of assets and trades on an exchange like a stock throughout the day, usually tracking an index.
On this page
An exchange-traded fund (ETF) is a pooled investment whose shares trade on a stock exchange at prices that change all day. Most ETFs track an index such as the S&P 500, though active, bond, commodity, leveraged and inverse ETFs also exist. They matter because they give small investors cheap, diversified, intraday-tradable exposure: the first US ETF, the SPDR S&P 500 Trust (SPY), launched in January 1993, and ETFs now hold trillions of dollars.
How it works
An ETF has two markets. Investors buy and sell existing shares with each other on the exchange, paying the bid-ask spread. Separately, large dealers called authorized participants create new shares by delivering a basket of the underlying securities (or cash) to the fund, or redeem shares by handing them back for the basket. That arbitrage keeps the market price close to the fund's net asset value (NAV).
The in-kind creation and redemption process also lets many equity ETFs pass on fewer capital-gain distributions than comparable mutual funds.
What to check
- Costs: the expense ratio plus the spread you pay to trade.
- What it holds: the index or strategy, its concentration and how often it rebalances.
- Liquidity: a thinly traded ETF on a liquid basket is usually fine; an ETF holding illiquid assets can drift from NAV in stress.
- Structure: leveraged and inverse ETFs reset daily and behave very differently over weeks.