ETF (Exchange-Traded Fund)
A basket of stocks or bonds that trades like a single stock, offering instant diversification with low fees.
What You Need to Know
ETFs are one of the best inventions in modern investing. They combine the diversification of mutual funds with the flexibility of individual stocks—and usually charge rock-bottom fees.
How ETFs Work:
- Fund owns hundreds/thousands of stocks
- You buy shares of the fund (not individual stocks)
- Trades on stock exchange all day like a stock
- Price fluctuates during market hours
Example: SPY (S&P 500 ETF):
- Owns all 500 stocks in the S&P 500
- One share = instant exposure to entire U.S. large-cap market
- Expense ratio: 0.09% ($9 per $10,000 invested)
ETF vs. Mutual Fund:
ETFs:
- Trade all day (real-time pricing)
- Usually lower fees (0.03-0.20%)
- More tax-efficient
- No minimum investment (buy 1 share)
Mutual Funds:
- Trade once per day (end-of-day pricing)
- Higher fees (0.50-1.50%)
- Can trigger capital gains
- Often have minimums ($1,000-$3,000)
Popular ETF Types:
1. Broad Market:
- VTI: Total U.S. stock market (3,600+ stocks)
- VOO/SPY/IVV: S&P 500
- VT: Total world (U.S. + international)
2. International:
- VXUS: International stocks (ex-U.S.)
- VWO: Emerging markets
3. Bonds:
- BND: Total U.S. bond market
- AGG: Aggregate bonds
4. Sector:
- XLF: Financials
- VGT: Technology
- VHT: Healthcare
5. Dividend:
- VYM: High dividend yield
- SCHD: Dividend growth
Tax Efficiency: ETFs rarely distribute capital gains because of "in-kind" creation/redemption process. Mutual funds distribute gains annually (tax hit in taxable accounts).
Liquidity: Popular ETFs (SPY, VOO, VTI) have millions in daily volume—buy/sell instantly. Niche ETFs can have low volume and wide bid-ask spreads.
Caution: Leveraged and inverse ETFs (2x, 3x) are for day trading only—they decay over time and are unsuitable for long-term holding.
Sources & References
This information is sourced from authoritative government and academic institutions:
- investor.gov
https://www.investor.gov/introduction-investing/investing-basics/investment-products/mutual-funds-and-exchange-traded-2
- sec.gov
https://www.sec.gov/files/ib_etfs.pdf
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Related Terms in Investment Analysis
Appreciation
The increase in an asset's value over time, whether it's real estate, stocks, or other investments.
Asset Class
A group of investments with similar behavior, risk, and regulatory profiles (e.g., stocks, bonds, cash).
Bond
A fixed-income investment where you loan money to a government or corporation in exchange for regular interest payments.
Bond Yield
The return an investor earns on a bond, expressed as a percentage, which can be calculated as current yield (annual interest ÷ current price) or yield to maturity (total return if held until maturity).
Capital Gains Tax
Tax on profits from selling investments like stocks, bonds, or real estate.
Capital Loss
A loss realized when you sell an investment for less than you paid for it, which can offset capital gains for tax purposes.