What are Exchange Traded Funds?

Exchange Traded Funds, or ETFs, generally track market indexes such as the S&P 500 and trade just like stocks on major stock exchanges. ETFs provide investors with inexpensive exposure to a wide range of asset classes such as domestic equities, foreign equities, bonds, real estate, currencies, and commodities. Some ETFs are even structured to appreciate when the tracked index declines in value. Actively managed ETFs are available, but are not as prevalent as index ETFs.

ETFs are pooled investment vehicles like a traditional mutual fund. However, ETFs fundamentally differ from mutual funds, which do not trade intra-day. Mutual funds take orders throughout the day during Wall Street trading hours, but the transactions actually occur at the close of the exchange. The price is the sum of the closing price of all of the stocks contained in the fund.

ETFs can be bought and sold throughout the day for various prices that closely track the underlying value of the securities in the index they are designed to match. This is an advantage to investors seeking to lock in the purchase or sale price of an ETF. ETFs can also be sold short, just like a stock.

Legally, ETFs are a class of fund falling under many of the same Securities and Exchange Commission reporting requirements as mutual funds.

Further reading: Why Use ETFs?