ETF

An Exchange-Traded Fund (ETF) is a type of investment fund that trades on stock exchanges, much like individual stocks. ETFs hold a basket of underlying assets - stocks, bonds, commodities, or other securities - and their shares can be bought and sold throughout the trading day at market-determined prices. ETFs combine features of mutual funds and stocks. Like mutual funds, they offer diversification by holding many securities in a single investment. Like stocks, they can be traded anytime the market is open, with prices that fluctuate throughout the day. This liquidity and flexibility have made ETFs extremely popular with both individual and institutional investors. Most ETFs are passively managed, designed to track the performance of a specific index. For example, an S&P 500 ETF holds shares of all 500 companies in proportion to their weights in the index. This passive approach typically results in very low expense ratios - often 0.03% to 0.20% annually - compared to actively managed mutual funds. There are also actively managed ETFs where managers make investment decisions to try to beat a benchmark. While these have higher fees than passive ETFs, they're often cheaper than comparable mutual funds and offer the same trading flexibility as other ETFs. ETFs cover virtually every investment strategy imaginable. Broad market ETFs track major indices. Sector ETFs focus on specific industries like technology or healthcare. Bond ETFs provide fixed-income exposure. Thematic ETFs target trends like clean energy or artificial intelligence. International ETFs offer exposure to foreign markets. The ETF structure offers tax advantages over mutual funds because of how shares are created and redeemed. When investors sell mutual fund shares, the fund may need to sell securities and distribute taxable capital gains to all shareholders. ETFs typically avoid this through their unique creation/redemption mechanism. For most investors, low-cost index ETFs form an excellent foundation for a diversified portfolio.