What Is an Exchange Traded Fund (ETF)?
An Exchange Traded Fund (ETF) is a type of investment fund that trades on an exchange, just like stocks. ETFs are composed of a variety of assets such as stocks, bonds, commodities and currencies. They provide investors with the ability to diversify their portfolios without having to purchase multiple individual securities. Unlike mutual funds which are priced once per day after the market closes, ETFs trade throughout the day at prices determined by supply and demand in the marketplace.
ETFs offer several advantages over traditional investments including lower costs due to economies of scale; greater liquidity since they can be bought or sold anytime during trading hours; transparency because all holdings must be disclosed daily; and tax efficiency since capital gains taxes are only paid when shares are sold rather than annually as with mutual funds. Additionally, many ETFs track indexes so there is no need for active management decisions which can reduce fees even further compared to actively managed mutual funds.