What is an ETF?

An exchange-traded fund is a pooled investment that trades on a stock exchange like a single share.

An exchange-traded fund (ETF) is a pooled investment vehicle: it holds a basket of assets — stocks, bonds, commodities, or other instruments — and divides ownership of that basket into shares that trade on a stock exchange all day, just like a stock. When you buy one share of an S&P 500 ETF, you are buying a small slice of all 500 companies at once.

Most ETFs are index funds: they follow published rules (an index) that determine what they hold. Others are actively managed, with a portfolio team choosing the holdings. Either way, the fund publishes its holdings, charges an annual fee (the expense ratio), and usually pays out the dividends or interest its holdings generate as distributions.

ETFs became popular because they combine diversification (one trade buys hundreds of securities), low costs (many broad index ETFs charge under 0.10% per year), transparency (holdings are disclosed), and flexibility (they trade at market prices throughout the day).