What an ETF is
An exchange-traded fund is a basket of investments you can buy and sell like a single share. Here is how ETFs work and what to check before you look at one.
ETF stands for exchange-traded fund. ETFs have become one of the most common ways ordinary investors own a slice of the stock market.
What it is
An ETF is a fund that holds a basket of investments: shares, bonds or both. You buy units of the fund, and each unit gives you a small piece of everything in the basket.
The "exchange-traded" part means you buy and sell ETF units on a stock exchange during the trading day, just like shares of a single company.
Index ETFs
Most ETFs follow an index. An S&P 500 ETF, for example, holds the companies in the S&P 500 in the same proportions. Its value rises and falls with the index. See What is the S&P 500.
Other ETFs follow a sector, such as banks or energy, a country, bonds, or a theme.
What it costs
Every ETF charges a yearly fee, taken from the fund's value. In the US it is called the expense ratio. In Canada you will usually see MER, for management expense ratio. Broad index ETFs tend to have low fees. Specialized ETFs often charge more.
You may also pay a trading commission each time you buy or sell, depending on your brokerage.
What to check
- What it holds. The fund's website lists its holdings.
- The yearly fee. Small differences add up over many years.
- How much it trades. Busy ETFs are easier to buy and sell at a fair price.
The short version
- An ETF is a basket of investments that trades like one share.
- Most follow an index.
- Check what it holds and what it charges each year.
This is general information, not investment advice.
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