Exchange-traded fund (ETF)

A pooled fund holding stocks, bonds or other assets whose shares trade on an exchange throughout the day like an individual stock.

What it means

An ETF bundles many investments into one fund, much like a mutual fund, but its shares are bought and sold through a brokerage account at market prices that change during the trading day. Most ETFs track an index, and many have low expense ratios. Investors make or lose money as the fund’s holdings change in value and as it passes along dividends or interest.

Risk depends on what the ETF holds: a broad stock ETF behaves like the stock market, while specialized, leveraged or inverse ETFs can be far riskier. Because of how ETF shares are created and redeemed, they often distribute fewer capital gains than comparable mutual funds, which can make them more tax-efficient in taxable accounts. Dividends are still taxed yearly, and gains are taxed when shares are sold.

Example

Suppose an investor buys 20 shares of a broad stock market ETF at $150, investing $3,000. They can sell at any point during market hours at whatever the price is at that moment.

How it’s used

Low-cost, diversified investing in brokerage accounts and IRAs
Gaining exposure to a sector, region or asset class in one trade
Building simple portfolios from a few broad funds

Strengths and weaknesses

Strengths

Often low expense ratios and no investment minimum beyond one share
Trades throughout the day with visible prices
Usually more tax-efficient than similar mutual funds

Weaknesses

Easy intraday trading can encourage frequent, costly trading
Market price can differ slightly from the value of holdings, and bid-ask spreads add cost
Niche, leveraged and inverse ETFs can be complex and volatile

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.