This article will provide a basic definition of what an ETF is. Exchange traded funds, also called ETFs, are securities that track a basket of assets, a commodity, or an index. They are similar to index funds, but they trade like stocks on exchanges. As these are purchased and sold, they experience price changes. The Spider is one of the most well known ETFs and it tracks the S&P 500 index.

These investment vehicles have been in existence in the United States since 1993 and since 1999 in Europe. When individuals buy and sell ETFs, they pay a broker commissions, just like with any regular order. The ETF trades at close to the same price as its underlying assets’ net asset values during the course of any trading day.

Through ETF ownership, individuals receive diversification like that offered by an index fund. However, shares can be purchased and sold throughout the day, similar to stocks. They also have the ability to purchase only one share, sell short, or buy on margin. ETFs tend to have lower expense ratios than those of most mutual funds. Investors appreciate the stock-like features, tax efficiency, and low costs of ETFs.

Individual shares in ETFs are not sold or redeemed at net asset value. Financial institutions sell and redeem these shares from the ETF directly in large blocks referred to as creation units. This provides ETFs with a mechanism that minimizes potential deviation between ETF share net asset values and the market price. In the U.S., most ETFs are established as open-ended management investment companies.

Investors use ETFs as long-term investments for purposes of asset allocation. They may also engage in frequent trading to implement various market timing investment strategies. ETFs feature  lower costs than some other investment products, transparency, flexibility in terms of buying and selling, exposure to diverse markets, and low capital gains. However, they are not without risk so they should be thorough researched.

To get a more in-depth ETF definition, read what are exchange-traded funds.

Keep learning more:

1. What Is Value Investing


2. How The Stock Market Works


3. What Are Exchange Traded Funds?


4. Types of Mutual Fund Fees and Expenses


5. Best CD Rates: How To Find The Best CD Rates


6. Best Mutual Funds: How to Pick the Best Mutual Fund


7. Inflation is the Biggest Risk of Bond Investing

Learn How to Invest

This website provides completely free investing courses for normal people so they can learn how to invest correctly, retire early, and find financial freedom and security.

Enter your email below, and I'll personally email you a free course on investing in gold, a free guide to dividend stocks, and a free course on building a passive investment income.

You'll also get weekly free tutorials on financial security, getting debt free, and living a wealthy lifestyle on a limited budget.

And it's all free. Get it all right now: