Exchange-traded fund (ETF)

Page written by AI. Reviewed internally on January 29, 2024.

Definition

An exchange-traded fund (ETF) is a type of investment fund that is traded on stock exchanges, similar to individual stocks.

What is an exchange-traded fund?

This is designed to track the performance of a specific index, sector, commodity, or asset class. ETFs offer investors a convenient way to gain exposure to a diversified portfolio of assets without directly owning each individual asset.

ETFs can contain a mix of stocks, bonds, commodities, or other assets, and their value fluctuates throughout the trading day as they are bought and sold on the exchange. They provide investors with an opportunity to invest in a broad market or a specific investment theme without having to buy and manage the underlying assets themselves.

One of the key advantages of ETFs is their liquidity and flexibility – they can be bought or sold at any point during trading hours, and their prices are updated in real time. Additionally, ETFs often have lower fees compared to traditional mutual funds.

In summary, an ETF is a type of investment vehicle that combines the characteristics of a stock and a mutual fund, offering investors a way to diversify their portfolio and gain exposure to various markets or assets with relative ease.

Example of exchange-traded fund

Consider the “ABC Technology ETF,” which is an ETF that aims to track the performance of a technology stock index. This ETF may hold a diversified portfolio of technology stocks. Investors can buy and sell shares of the ABC Technology ETF on a stock exchange throughout the trading day, just like individual stocks.

Investors who buy shares in the ABC Technology ETF effectively gain exposure to the overall performance of the technology sector without having to buy each individual stock separately. ETFs provide a convenient and cost-effective way for investors to diversify their portfolios and gain exposure to specific sectors, industries, or asset classes.

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