What Is an ETF?

An exchange traded fund (ETF) is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies. ETFs are in many ways similar to mutual funds; however, they are listed on exchanges and ETF shares trade throughout the day just like ordinary stock.

A well-known example is the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index. ETFs can contain many types of investments, including stocks, commodities, bonds, or a mixture of investment types. An exchange traded fund is a marketable security, meaning it has an associated price that allows it to be easily bought and sold.

Key Takeaways

•     An exchange traded fund (ETF) is a basket of securities that trade on an exchange, just like a stock.
•     ETF share prices fluctuate all day as the ETF is bought and sold; this is different from mutual funds that only trade once a day after the market closes.
•     ETFs can contain all types of investments including stocks, commodities, or bonds; some offer U.S. only holdings, while others are international.
•     ETFs offer low expense ratios and fewer broker commissions than buying the stocks individually.

 Types of ETFs

There are various types of ETFs available to investors that can be used for income generation, speculation, price increases, and to hedge or partly offset risk in an investor's portfolio. Below are several examples of the types of ETFs.

1.     Bond ETFs might include government bonds, corporate bonds, and state and local bonds—called municipal bonds.
2.     Industry ETFs track a particular industry such as technology, banking, or the oil and gas sector.
3.     Commodity ETFs invest in commodities including crude oil or gold.
4.     Currency ETFs invest in foreign currencies such as the Euro or Canadian dollar.
5.     Inverse ETFs attempt to earn gains from stock declines by shorting stocks. Shorting is selling a stock, expecting a decline in value, and repurchasing it at a lower price.
   

 How to Buy and Sell ETFs

ETFs trade through online brokers and traditional broker-dealers. You can view some of the top brokers in the industry for ETFs with Investopedia's list of the best brokers for ETFs. An alternative to standard brokers are robo-advisors like Betterment and Wealthfront who make use of ETFs in their investment products.

Credits : Investopedia