Stock Market 101: What is an Exchange-Trade Fund(ETF)?

Sai Vikram Kolasani
May 2, 2020
2 min read

Overview:

1. What is an ETF?

2.Types of ETFs

3.How to Buy and Sell

4.Pros and Cons of ETFs

What is an ETF?

An Exchange-Trade Fund is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index. An easy way to think of them is as a mixture of Mutual Funds and Stocks. They are a collection or pool of securities like mutual funds but are traded like stocks and other exchanges. The price of an ETF’s shares will change throughout the trading day as the shares are bought and sold on the market.

Types of ETFs

There are numerous assorted types of ETFs.

1) Bond ETFs might include government bonds, corporate bonds, and state and local bonds—called municipal bonds. 2) Industry ETFs track a particular industry such as technology, banking, or the oil and gas sector. 3) Commodity ETFs invest in commodities including crude oil or gold. 4) Currency ETFs invest in foreign currencies such as the Euro or Canadian dollar. Inverse ETFs attempt to earn gains from stock declines by shorting stocks. Shorting is selling a stock, expecting a decline in value, and repurchasing it at a lower price.

How to Buy and Sell

This was already hinted but here is a short description. ETFs are traded on various online brokers and traditional broker-dealers. like stocks are. The same way stocks are purchased or sold, ETFs are too.

Pros and Cons of ETFs

Pros

Access to many stocks across various industries
Low expense ratios and fewer broker commissions.
Risk management through diversification
ETFs exist that focus on targeted industries

Cons

Actively-managed ETFs have higher fees
Single industry focus ETFs limit diversification
Lack of liquidity hinders transactions

Key points:

1) An exchange-traded fund (ETF) is a basket of securities that trade on an exchange, just like a stock. 2) ETF share prices fluctuate all day as the ETF is bought and sold; this is different from mutual funds that only trade once a day after the market closes. 3) ETFs can contain all types of investments including stocks, commodities, or bonds; some offer U.S. only holdings, while others are international. 4) ETFs offer low expense ratios and fewer broker commissions than buying the stocks individually.