ETF (Exchange-Traded Fund)
A fund that trades like a stock all day - usually holding an index at a low expense ratio.
A fund that trades like a stock all day - usually holding an index at a low expense ratio.
An ETF is a basket of securities listed on an exchange, priced continuously while markets are open - unlike a mutual fund that computes one net asset value each evening. Most hold an index passively, which is why broad-market ETFs carry the category's lowest expense ratios, and the intraday listing brings two features mutual funds lack: you can set limit orders, stops and even buy fractional shares at a chosen price. Tax structure adds another advantage - the creation/redemption mechanism often lets the fund shed low-basis holdings instead of distributing them.
The mechanics worth checking before buying: the expense ratio, tracking difference versus the index it claims, bid-ask spread (thin ETFs can cost more to exit than their ratio suggests), and what the fund actually owns - some 'exposure' products use derivatives and behave differently from the index. For most long-term investors, a broad, liquid, low-ratio ETF held inside a tax-advantaged account is the default, with active or thematic ETFs treated as deliberate tilts rather than core holdings.
Worked example
A broad-market ETF with a 0.03% ratio and a two-cent spread on a $50 share is cheaper to own than an actively managed fund at 0.85% - and you can buy it at a limit price mid-session instead of waiting for an end-of-day NAV.
Related terms and tools
Expense ratio, Portfolio rebalancer, Investment return calculator
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