Exchange-Traded Fund (ETF)

An exchange-traded fund, or ETF, is a basket of securities — often tracking an index, though not always — that trades on a stock exchange throughout the trading day, the same way an individual stock does, rather than being priced once after the market closes.

That trading mechanism is the real distinction from a traditional mutual fund, including an index mutual fund holding the identical basket of stocks. A mutual fund is bought or sold at a single price calculated after the market closes each day, called its net asset value. An ETF's price moves continuously while markets are open, rising and falling with buyer and seller demand throughout the day, and can be bought or sold at any point in that window like a share of Apple or Ford.

Not all ETFs are the passive kind

Most ETFs began, and remain, as low-cost vehicles for tracking a broad index. But the label itself only describes the trading structure, not the strategy inside it. Actively managed ETFs, sector-specific ETFs, and leveraged or inverse ETFs designed to move two or three times a benchmark's daily return all exist under the same wrapper. Two funds can both say "ETF" and behave nothing alike.

What to check before buying one

Before treating an ETF as a simple, diversified holding, it's worth confirming what it actually tracks, how it's weighted, and whether it uses leverage or derivatives to do it. A fund named after a broad theme can hold a surprisingly narrow or concentrated set of underlying positions.

• Intraday trading means an ETF's price can deviate briefly from its underlying holdings' value.
• Expense ratios vary widely between ETFs, from near zero to well over 1% a year.
• "ETF" describes a structure, not a risk level.