What is an ETF?

An ETF, short for Exchange-Traded Fund is a fund that holds a collection of assets, such as stocks or bonds, and trades on a stock exchange just like a single share. When you buy one share of an ETF, you are instantly buying a tiny slice of everything that fund holds.

What does an ETF typically hold?

Most ETFs are designed to track an index. An S&P 500 ETF, for example, holds shares in all 500 companies in the S&P 500 index. When the index goes up, the ETF goes up. When it falls, the ETF falls. Some ETFs track bond markets, commodities, specific sectors like technology or healthcare, or geographic regions like Europe or emerging markets.

Why are ETFs popular?

Three main reasons. First, they offer instant diversification. One purchase spreads your money across dozens or hundreds of companies. Second, they are cheap to own. Because most ETFs simply track an index rather than relying on expensive fund managers to pick stocks, their fees are very low. Third, they are easy to buy and sell. Unlike some other fund types, ETFs trade throughout the day on a stock exchange.

Who are ETFs good for?

Almost every type of investor. Beginners benefit from the simplicity and diversification. Experienced investors use them to build efficient, low-cost portfolios. Even professional investors use ETFs to get exposure to markets quickly.

What are the risks?

An ETF that tracks the stock market will fall when the market falls. Diversification reduces the impact of any single company collapsing, but it does not protect you from broad market declines. ETFs that track narrow sectors or use leverage carry additional risks and are generally not suitable for beginners.