What is an ETF?

Some investors spend days if not weeks deciding whether buy a stock. Most people’s goal is to find stocks that will provide good returns, but many people don’t have the time nor expertise to pick stocks.

ETFs or exchange-traded funds are investment funds that are traded on a stock exchange, similar to stocks.

ETFs that track an index are one alternative that provides diversification, at lower balances, lower transaction costs, and with flexibility. When investing in an index ETF, your returns usually depend on where the broader market goes, rather than individual stocks.

An ETF holds the underlying assets of the fund, which could be stocks, commodities or bonds as examples. And many ETFs will track an index, such as the S&P 500.

The S&P 500 is the 500 largest companies listed on the NYSE or NASDAQ. This means in one trade you are gaining exposure to 500 companies. Before ETFs, you would have to buy at least one share from each company or invest through managed investment schemes to have similar exposure. This would usually come with multiple brokerage fees or higher fees (for the managed investment scheme) than buying an ETF.

Further, many ETFs are what investors call marketable securities, which means they can be readily converted to cash at the market price. They are liquid financial assets. Liquid ETF are actively traded which means their prices can change daily as they are bought and sold.

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Source: What is an ETF? – Spaceship