An exchange-traded fund (ETF) is an investment vehicle that tracks a specific investment index.
ETFs often are compared to index funds, which also use baskets of investments such as stocks or bonds to replicate well-known indexes, such as the S&P 500 Index of stocks or the broad bond market.
While similar to index funds in many ways, ETFs are not mutual funds but marketable securities in their own right. As a result, they can be traded during market hours rather than settling at the end of the trading day.
Generally, this feature makes ETFs cheaper to buy and sell than their index-fund cousins.
At their core, exchange-traded funds are baskets of securities that trade on a stock exchange. Think of them as mutual funds that you buy on the stock market rather than from a fund company.
ETFs can be part of a diversified investment portfolio. They have features that make them attractive to speculators as well as to long-term investors.
For instance, an exchange-traded fund by design can provide more tax-efficient investing vs. using actively traded mutual funds.
As with traditional mutual funds, different ETFs have different purposes. ETFs initially were created to trade market indexes. However, there are ETFs that engage in active trading strategies.
In addition, some financial advisors recommend ETFs based on their ability to use them in advanced trading or options strategies.
Further, many low-cost brokerage firms offer a slate of “no commission” ETFs. Zero commissions make it efficient to take small positions in the asset class represented by the fund.
Transacting in ETFs requires a more involved approach than traditional mutual funds. ETFs trade during market hours and the price per share will fluctuate during the trading day.
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