Investing term

What is ETF?

Exchange-Traded Fund — a basket of many stocks (or bonds) bundled into a single share that trades on an exchange like a regular stock.

An ETF (exchange-traded fund) is a single fund that holds a basket of many investments — often hundreds of stocks or bonds — but trades on an exchange like one ordinary share. Buy one share of a total-market ETF and you instantly own a tiny slice of every company in it, which is why ETFs are one of the cheapest ways to get instant diversification.

The "exchange-traded" part matters: unlike a traditional mutual fund that only settles once a day after the market closes, an ETF's price updates live throughout the trading day and you can buy or sell it anytime the market is open. The most popular ETFs are "index" ETFs that simply track a benchmark, which keeps their annual fee (the expense ratio) very low.

For example

One share of an S&P 500 ETF gives you a position in all 500 companies at once — for an annual fee often under 0.1%, or about $1 a year per $1,000 invested.

ETF is taught hands-on in Stage 6 — Index Funds, ETFs & Mutual Funds.

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Related terms

Active fundA fund whose manager picks stocks in the hope of beating a benchmark.BenchmarkThe reference index a fund compares itself to — e.g. the S&P 500, MSCI World, or Bloomberg Aggregate.Creation/redemptionThe mechanism that keeps ETF prices close to NAV. Authorized participants swap baskets of underlying stocks for ETF shares (or vice versa).DistributionThe income a fund pays out to its shareholders — dividends from stocks held, plus realized capital gains.
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