What is an ETF? A Beginner's Guide
Discover why Exchange-Traded Funds are one of the most popular investment tools.
What is an ETF?
An Exchange-Traded Fund (ETF) is a type of investment fund that is traded on stock exchanges, much like stocks. An ETF holds a collection of assets such as stocks, bonds, or commodities. An ETF can be designed to track a specific index (like the S&P 500), a sector (like technology), or a commodity (like gold).
Instant Diversification
The biggest advantage of an ETF is instant diversification. Instead of buying hundreds or thousands of individual stocks, you can buy a single share of an ETF and get exposure to all the assets it holds. This spreads out your risk, so the poor performance of one company doesn't have a major impact on your overall investment.
Low Cost
ETFs are known for their low expense ratios (the annual fee charged by the fund). Because most ETFs passively track an index rather than being actively managed by a fund manager, their operating costs are much lower. These savings are passed on to investors.
How are ETFs Different from Mutual Funds?
Both ETFs and mutual funds are baskets of investments. The main difference is how they are traded. ETFs can be bought and sold throughout the day on a stock exchange at a fluctuating price, just like a stock. Mutual funds, on the other hand, are priced only once per day after the market closes.
A Great Tool for Beginners
For most people, especially beginners, buying a broad-market, low-cost ETF is one of the simplest and most effective ways to start investing. It allows you to participate in the growth of the entire market without needing to pick individual winning stocks.