Exchange-Traded Fund (ETF)

An exchange-traded fund (ETF) is a collection of a mixture assets, i.e. stocks, commodities, bonds, or cryptocurrencies that tracks an index or underlying portfolio of investments.

Of note, an ETF functions an arbitrage mechanism that is designed to keep it trading close to its net asset value.

Most tradable ETFs track a specific index. This most commonly mirrors a stock or bond index.

The popularity of ETFs has grown in recent years and are seen as an attractive investment due to its low cost, efficiency, and stock-like features.

ETFs have also become a cornerstone offering at many retail brokerages. These instruments are quite flexible and grant traders exposure to myriad asset classes.

ETFs Explained

At its core, an ETF is a type of investment fund. Within this fund is a basket of assets, be it stocks, bonds, commodities, etc.

The overall ownership or exposure to these assets are divided into shares that are held by shareholders.

An example of this is an ETF tracking major stock indices such as the S&P 500.

Shares of the ETF represent exposure to the entire index, which itself is a composite of 500 firms traded on the New York Stock Exchange (NYSE).

Other common ETFs include gold or silver funds, which grant investors exposure to these assets without owning physical metals for example.

Overall, the details of the structure of ETFs do vary by country or jurisdiction. Shareholders of ETFs are entitled to a share of the profits, such as interest or dividends.

ETFs can be thought of as similar to traditional mutual funds, except that shares in an ETF can be bought and sold throughout the day like stocks on a stock exchange through a broker.

Unlike traditional mutual funds, however ETFs do not sell or redeem their individual shares at net asset value (NAV).