What Is An ETF?

Summary

• ETFs are baskets of securities that trade on an exchange just like a stock.
• They can invest in virtually any security in existence - stocks, bonds, REITs, commodities, preferreds, derivatives contracts, cash and more.
• ETFs offer investors the advantages of low fees, tax efficiency, transparency and variety in an easy-to-access investment vehicle.
• If you're looking for simple, low-cost access to the financial markets, ETFs are something that should be on your radar.

The very first ETF, the SPDR S&P 500 ETF (SPY), launched more than 25 years ago and since then the ETF industry has ballooned to more than $3.7 trillion in total assets. For many investors, ETFs have become the investment vehicle of choice and have replaced their predecessor, the mutual fund, in countless individual portfolios.

If you're an investor considering adding ETFs to your own portfolio, it's important to first understand how they work, their strengths and weaknesses and whether or not they're a good fit for you personally. But before we get to that, let's take a look at exactly what ETFs are.

What is an ETF?

ETF is an acronym for exchange-traded fund. They are baskets of securities that are divided into shares and traded on an exchange just like a stock. ETFs can invest in virtually any security in existence - stocks, bonds, REITs, commodities, preferreds, derivatives contracts, cash and more. They can be broadly diversified, such as the iShares Russell 1000 ETF (IWB) which invests in the largest companies in the United States, or they can focus on a specific sector, style or region of the world. The Vanguard Information Technology ETF (VGT) and the iShares MSCI France ETF (EWQ) would fall into the latter group.

Some ETFs are actively-managed but the majority are structured as passively-managed index funds. Instead of trying to outperform an index, they simply try to match it. Index funds can track a popular benchmark, such as the S&P 500, or they can follow a rules-based index that targets a specific segment of the market. The SPDR Portfolio S&P 500 High Dividend ETF (SPYD), for example, invests in just the 80 highest-yielding securities from within the S&P 500.

If you want to gain an appreciation for the variety of ETFs that are

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.