An exchange-traded fund (ETF) is a basket of investments like stocks or bonds. Exchange-traded funds let you invest in many securities all at once, making them a popular choice for investors looking to diversify their portfolios. When you're shopping around for an exchange-traded fund (ETF) or mutual fund, there are two main types to consider based on how they're managed: passively managed ETFs and actively managed ETFs.
Passively managed ETFs track a specific index, such as the S&P 500, and aim to replicate its performance. These funds typically have lower expense ratios and are a cost-effective way to gain exposure to a broad market. Actively managed ETFs, on the other hand, are managed by a team of experts who aim to outperform the market through strategic stock picking and asset allocation.
Investment choice: ETFs give investors new investment choices because they create new securities as funds. With an ETF, you can invest in an entire industry, region, or market sector without having to buy individual stocks. This diversification helps reduce risk and volatility in your portfolio.
Commitment to Our Readers ... An ETF is a collection of securities packaged and sold in a single basket or fund. Most ETFs are passively managed, meaning they aim to replicate the performance of a specific index or benchmark. This passive approach typically results in lower fees and taxes compared to actively managed funds.
In reality, ETFs can trade at a premium or discount to their net asset value (NAV), or the value of all the securities it holds. This price fluctuation is due to supply and demand dynamics in the market. The first defined-outcome exchange-traded fund launched in 2018. Today, there are nearly 270 funds, with $47 billion in aggregate assets.
What does an ETF do? An ETF fund works by tracking as closely as possible the price of an index or a collection of assets. Investors buy units of the ETF, which are traded on the stock exchange just like individual stocks. This liquidity and transparency make ETFs a popular choice for both retail and institutional investors.
So what is an ETF? Well, it's a mutual fund too. It's a pooled investment vehicle that offers diversified exposure to a particular area of the market. It can be traded throughout the day, unlike mutual funds, which are priced at the end of the trading day. For example, ticker symbol VOO, the Vanguard ETF that attempts to replicate the S&P 500, has an expense ratio of 0.03%, meaning that for every $10,000 invested, you would pay just $3 in fees annually.
