Exchange-traded funds (ETFs)

Definition

Exchange-Traded Funds (ETFs) are investment funds traded on stock exchanges, much like stocks. They hold a diversified portfolio of assets such as stocks, bonds, or commodities.

5 Must Know Facts For Your Next Test

1. ETFs provide diversification by holding multiple underlying assets.
2. They are traded throughout the trading day at market prices, unlike mutual funds which trade at the end of the day.
3. ETFs often have lower expense ratios compared to mutual funds due to their passive management style.
4. They can be used for various strategies such as hedging, short selling, and arbitrage.
5. The first ETF was introduced in the U.S. in 1993 and has since become a popular investment vehicle.

Review Questions

• What is the primary advantage of ETFs over individual stocks?
• How do ETFs differ from mutual funds in terms of trading?
• Why might an investor choose an ETF with a low expense ratio?

Related terms

Mutual Fund: A type of investment fund that pools money from many investors to purchase securities, managed by a professional manager.

Index Fund: A type of mutual fund or ETF designed to replicate the performance of a specific index like the S&P 500.

Expense Ratio: The annual fee that all funds or ETFs charge their shareholders, expressed as a percentage of the fund's average assets under management.