What Is an ETF?

How it works

An ETF pools investors' money to hold a basket of investments, often every stock or bond in an index. Unlike a traditional mutual fund, its shares trade on a stock exchange throughout the day at market prices, just like a stock. Large traders can create and redeem shares directly with the ETF at its net asset value, and they profit by closing any gap, which generally keeps the market price close to the value of what the fund holds.¹

The ETF holds	500 companies
You buy	10 shares at $80 = $800
You now own	A small slice of all 500
Expense ratio	0.05% a year
Yearly cost on $800	$0.40

ETFs and mutual funds

Both are funds and both charge an expense ratio. The main difference is how they trade. A mutual fund fills every order at the next net asset value it calculates, typically once a day after the major exchanges close.² An ETF trades all day at market prices, so buyers also pay the bid-ask spread. Mutual Funds vs. ETFs compares them in full.

What to check before buying

• What it holds, and whether it follows an index or a manager's choices.
• Its expense ratio, and how much it trades, which affects the spread.
• Whether it's leveraged or inverse. Those reset their positions every day, can drift far from their target over longer periods, and the SEC describes them as typically inappropriate for intermediate or long-term investing.³