What Is an ETF?

An ETF (exchange-traded fund) is a fund that holds a basket of investments, such as all the stocks in the S&P 500, and trades on a stock exchange like a single stock. Buying one share gives you a slice of the whole basket.

How ETFs work

Most ETFs track an index: the fund buys what the index holds, in the same weights, and its price follows the index. Others are actively managed, or follow a theme, a strategy or another asset class such as bonds or gold.

Large institutions can swap baskets of stocks for new ETF shares and back again, which keeps the ETF’s price close to the value of its holdings and makes ETFs tax-efficient compared with most mutual funds.

What to look at

Expense ratio: the yearly fee as a share of your investment. Broad index ETFs charge as little as 0.03%; specialised ones can charge 0.5–1% or more.

Holdings: what the fund actually owns, and how concentrated it is in its top positions and sectors. Two funds with similar names can hold very different things.

Size and trading volume: large, heavily traded funds have narrower bid-ask spreads and are less likely to close.

Put it to use

Low-cost ETFs →Compare two ETFs: VOO vs VTI →

General information, not investment advice.