Investing & Markets

What is ETF?

An ETF pools money from many investors to buy a diversified portfolio of stocks, bonds, or commodities. Most ETFs track a market index like the S&P 500. Most ETFs are designed to track a specific benchmark index, like the S&P 500, offering broad diversification in a single security.

ETFs are regulated under the Investment Company Act of 1940. Under SEC Rule 6c-11, adopted in 2019, ETFs are permitted to operate under a standardized framework without individual exemptive orders. Unlike mutual funds, which trade only once per day at the end-of-day NAV, ETFs trade on national exchanges throughout the trading day at fluctuating market prices.

ETFs are popular for their low expense ratios and tax efficiency. Because ETF shares are bought and sold on the secondary market between investors, the fund does not have to liquidate underlying assets to satisfy redemptions, minimizing capital gains distributions.

Quick Facts

Trading WindowTraded on exchanges throughout the active trading day

Primary RegulationInvestment Company Act of 1940 (Rule 6c-11)

Expense StructureGenerally lower expense ratios than mutual funds

Tax EfficiencyLower capital gains distributions due to in-kind creations

PRACTICAL EXAMPLE

An investor purchases 50 shares of an S&P 500 ETF at $400 per share, investing $20,000. The fund holds shares in all 500 S&P companies, providing the investor with broad market diversification. The investor can sell their shares at any point during market hours.

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RELATED TERMS

Learn More Key Concepts

StockA financial security representing a fractional share of ownership in a corporation, conveying voting rights and claims on assets.

BondA debt security representing a loan made by an investor to a borrower, typically a corporation or government agency.

Mutual FundA pooled investment vehicle managed by professionals that buys a diversified portfolio of securities, priced once daily.

Index FundA mutual fund or ETF designed to track the performance of a specific market index, offering passive diversification at low cost.

DiversificationA risk management technique that mixes a wide variety of investments within a portfolio to reduce volatility and single-stock risk.

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