What are ETFs

AI Overview

An ETF, or exchange-traded fund, is a type of investment fund that holds a diverse basket of assets like stocks, bonds, or commodities. It's unique because it trades on stock exchanges like individual stocks throughout the trading day, not just once a day like mutual funds. ETFs offer investors a simple way to diversify their investments, often at a low cost, and they typically track a market index, sector, or theme.

How ETFs work

Pooled Investments:

An ETF pools money from many investors to buy a diversified portfolio of underlying securities.

Index Tracking:

M

ost ETFs are designed to track a specific market index, like the S&P 500, or a particular sector, such as technology or energy.

Exchange Trading:

Investors buy and sell ETF shares on a stock exchange through a broker, similar to how they would trade shares of any publicly traded company.

Price Fluctuation:

The price of an ETF share fluctuates throughout the trading day, based on supply and demand for the fund.

Key characteristics

Diversification: ETFs provide instant diversification by giving investors exposure to many different investments at once.

Affordability:

Many ETFs have lower fees (expense ratios) compared to traditional investment products, and they can reduce brokerage costs.

Liquidity:

Because they trade like stocks, ETFs can be bought and sold easily during market hours.

Transparency:

An ETF's holdings are generally disclosed daily, making them transparent.

Why investors use ETFs

Simplicity:

They provide an easy way to invest in a broad range of assets without needing to buy each security individually.

Accessibility: They are a building block for diversified portfolios, helping investors match their financial goals, such as growth or income. Flexibility: Investors can choose ETFs that align with their investment objectives, from tracking major stock markets to focusing on specific industries or bond types.