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.
Most ETFs have a "theme" that determines the composition of that particular ETF. For example, an ETF can represent and cover
- specific industries (e.g. the Utilities Select Sector SPDR Fund covers US utilities)
- regions (e.g. the iShares MSCI All Country Asia ex-Japan ETF)
- market caps and styles (e.g. the iShares Russell 2000 Growth ETF)
- investment strategies (like the VanEck Vectors Social Sentiment ETF)
- specific commodities (e.g. the Aberdeen Standard Physical Silver Shares ETF)
- other themes (e.g. ESG investing)
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.
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:
- What is the difference between mutual funds and ETFs?
- What is the difference between US and EU ETFs?
- What does an ETF portfolio mean?
- What is an ETF expense ratio?
- How to invest in ETFs?
- How liquid are ETFs?
- How to buy Vanguard ETFs?
- How to buy iShares ETFs?
- What are sector ETFs?
- What is passive investment?
- Are US ETFs only available for US residents?
How can I buy ETFs?
For more info, click here to learn how to buy ETFs online.