In plain words: An investment fund traded on stock exchanges, much like stocks.
An ETF (exchange-traded fund) is a vehicle that pools money from many investors and holds a basket of underlying assets. Because it trades on an exchange throughout the day, you can buy or sell a single share much as you would a stocks. Many ETFs simply track an index, which makes them a common, low-cost way to gain broad exposure without picking individual securities.
How does an ETF work?
A single ETF share represents a slice of everything the fund holds. If a fund follows a basket of global equities, buying one share gives a tiny stake in hundreds of companies at once. This built-in diversification is one reason a profile like a beginner's often gravitates toward these vehicles.
Why are ETFs popular with long-term investors?
Index-tracking ETFs tend to carry lower running costs than actively managed funds, and costs compound over time. Learn more about how fees affect returns in low costs. They also make it simple to spread money across asset classes such as equities, bonds or cash in a single, transparent product.
Key takeaways
- An ETF bundles many assets into one share that trades on an exchange.
- Index ETFs offer broad, low-cost exposure to an asset class.
- They suit investors who prefer a simple, passive approach.