An ETF, exchange-traded fund, is a type of investment fund and is very similar to a mutual fund. The difference is that ETFs can be traded on stock exchanges throughout the day whereas mutual funds can be traded on their price at the end of the day. An ETF holds assets like stocks, currencies, or commodities. It is also marketable security, which means that it has a corresponding price that makes it easy to trade. It usually works with an arbitrage system that is designed to keep the trades close to their net asset value, though deviations can sometimes happen. An ETF can track anything from the individual commodity to an assembly of securities, it can even track some particular investment strategies.
ETFs are mostly index funds, meaning that, like a certain stock market index, they hold the same securities in the same amount. One of the much-known examples of it is the SPDR S&P 500 ETF, which tracks the S&P 500 Index. Since ETFs are all openly administered, all the stocks under each ETF are updated daily on their domain.
The ownership of ETF is divided based on the shares that each shareholder holds. The structure varies across different countries. The shareholders secondarily possess the assets in the funds. They usually are given annual reports to keep them informed about the ETF. The shareholders get a share of the profit, like a dividend, if there is any. ETFs seem more attractive as an investment due to their liquidity, tax efficiency, and cost.
An exchange-traded fund (ETF) is called like that because it is traded like stocks on an exchange. The price of the shares changes throughout the day when shares are traded on the market. This is different than a mutual fund in the sense that trading only happens at the end of the day when the market is closed. This is also what makes ETF more liquid and cost-effective than mutual funds because the share can be bought and sold anytime.
ETF can contain a vast amount of stocks either across different industries or limited to a certain industry. Looking at the index, some ETFs focus solely on a country but some provide a more international offering. Take banking ETF as an example, it contains stocks from various banks in the industry.
The key points in understanding what an ETF is are that ETF is a collection of securities that are traded on an exchange, much like stocks. The share prices change throughout the day as they are bought and sold. An ETF provides a lower expense ratio and broker commissions as compared to purchasing stocks. The types of investments are not limited to just stocks, it can contain investments like bonds and commodities. ETF is a pretty interesting investment to venture into especially for new investors that just joined the investing game.