What is an ETF? Definition and explanation

Written by
Gergely K.
Fact checked by
Adam N.
Updated
Mar 2023

ETF is short for exchange-traded fund. An ETF is fund traded on a stock exchange. A fund can include many assets types, including equities, bonds, commodities or even forex. For example, a fund that tracks the S&P 500 Index holds the 500 stocks that constitute the index. The most popular ETFs are equity ETFs that track popular equity indexes like the NASDAQ 100 or the S&P 500.

ETFs are issued by asset management companies like Vanguard or BlackRock. One asset management company can issue many ETFs.

What does exchange-traded mean?

It simply means that ETFs are designed to be bought and sold on trading venues and exchanges, just like stocks. Investing in an ETF feels the same as buying or selling a stock.

What is a fund? 

A fund can hold hundreds, if not thousands of different stocks or other assets (e.g. bonds in the case of a bond ETF). It represents the underlying index or commodity exposure.

A physical gold ETF, for example, would have only gold (as a commodity), whereas a gold miners ETF would have exposure to a variety of gold miner stocks.

How does an ETF behave?

An ETF is usually a passively managed fund. In most cases, ETFs track an index - consisting of stocks or bonds of a specific industry or country.

This usually results in the ETF (such as the SPY ETF) moving in tandem with the underlying index (in this case, the S&P 500 Index). Sometimes the price of an ETF will be slightly different from its Net Asset Value (i.e. the value of all securities held by the ETF), but this premium or discount is usually no more than a few percentage points. If you buy with a discount to NAV, it means you are actually buying the ETF cheaper compared with the price you'd be paying if you bought all the assets it holds individually.

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What else do you need to know about ETFs?

Want to know more before deciding which is the best ETF for you? Check out these articles to deepen your knowledge:

How can I buy ETFs? 

For more info, click here to learn how to buy ETFs online.

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author
Gergely Korpos
Author of this article
With over a decade of experience in financial markets, I've executed thousands of trades as both a commodity trader and an equity portfolio manager. I have hands-on experience in opening accounts with the brokers that are listed on BrokerChooser. As the co-founder and Chief Product Officer (CPO) of BrokerChooser, my mission is to demystify personal investing for all.
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