ETFs

An exchange-traded fund (ETF) is a type of investment fund that trades on stock exchanges, designed to give investors exposure to a specific index, sector, commodity, or asset class. Most ETFs are passively managed and seek to track the performance of their benchmark with low costs, though a minority of active and specialized ETFs exist.

ETFs are created and redeemed in large blocks by authorized participants through a process that helps keep the ETF's market price close to its underlying net asset value. Shares are listed on exchanges and can be bought and sold throughout the trading day at market prices, just like stocks. The fund's holdings may be replicated physically (owning the actual securities) or synthetically (using derivatives).

Costs are typically expressed as the expense ratio and tend to be lower than those of traditional mutual funds. Tax efficiency arises from in-kind creation and redemption, which can reduce capital gains distributions. However, trading costs, bid-ask spreads, and potential tracking error—where the ETF's performance diverges from its benchmark—are considerations for investors.

Common ETF types include broad-market index ETFs, sector and industry ETFs, commodity ETFs, bond ETFs, and smart-beta or leveraged and inverse ETFs. Risks include market risk, liquidity risk for underlying assets, and, for synthetic or leveraged products, counterparty or compounding risk. Holdings are often disclosed daily for transparency.

ETFs have become a popular vehicle for core portfolio construction and tactical positioning. The first ETF, the SPDR S&P 500 ETF (ticker SPY), began trading in 1993 in the United States, and the market has since expanded worldwide under regulatory oversight in respective jurisdictions.