What Is an ETF?

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An exchange-traded fund (ETF) is an investment vehicle traded on stock exchanges. An ETF holds assets such as stocks or bonds and seeks to trade at approximately the same price as the net asset value of its underlying assets over the course of the trading day.

Most ETFs track an index, such as the S&P 500® Index or MSCI EAFE® Index. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features. ETFs are typically subject to commission costs each time a buy or sell order is executed. Depending on the amount of the trading activity, the lower costs of ETFs may be outweighed by commissions and related trading costs.

ETFs resemble mutual funds in structure but can be traded throughout the day like stocks. An ETF combines the benefits of a mutual fund which can be bought or sold at the end of each trading day for its net asset value, with the tradability feature of a closed-end fund, and trades throughout the trading day at market prices that may be more or less than its net asset value. Closed-end funds are not considered to be exchange-traded funds, even though they are funds and are traded on an exchange.

ETFs have been available in the U.S. since 1993 and in Europe since 1999. ETFs traditionally have been index funds, but in 2008 the U.S. Securities and Exchange Commission began to authorize the creation of actively-managed ETFs.