ETF (Exchange-Traded Fund)
An exchange-traded fund (ETF) is a pooled investment fund that holds a basket of assets and trades on a stock exchange like a single stock.
An ETF bundles many securities, such as stocks, bonds or commodities, into one fund whose shares are listed on an exchange. Investors can buy and sell ETF shares throughout the trading day at market prices, just as they would trade shares of a company.
Most ETFs track an index. An S&P 500 ETF, for example, holds the stocks in that index in roughly the same weights, so its value moves closely with the index. Other ETFs focus on a sector, a country, a bond category or a strategy such as dividend stocks.
ETFs are popular because they offer instant diversification, often at a low expense ratio, and because their holdings are usually published daily. A special creation and redemption process lets large institutions exchange ETF shares for the underlying securities, which keeps the market price close to the fund's net asset value and tends to make ETFs tax-efficient.
Example: buying one share of a broad-market ETF gives you a small slice of hundreds of companies in a single trade.