What Is a Stock Exchange-Traded Fund (ETF)?
Let me explain directly: a stock exchange-traded fund, or ETF, is a security that tracks a specific set of equities. You can trade these on exchanges just like regular stocks, and they follow equities in the same way an index does. They might focus on stocks in one industry or cover an entire index of equities. If you buy shares in a stock ETF, you're getting exposure to a whole basket of equities, which limits the risk tied to any single company while giving you a cheap way to diversify your portfolio.
Understanding Stock Exchange-Traded Funds (ETFs)
An ETF in general lets you track various assets like indexes, commodities, sectors, or stocks themselves. You buy shares that trade on stock exchanges, with prices fluctuating throughout the day just like stocks. They're more cost-effective and liquid than mutual funds. When it comes to stock ETFs specifically, they give you access to a group of equities in a sector or index without needing to buy each stock individually. For example, they can track energy sector stocks or the full S&P 500. Some use methods like the Stochastic Oscillator for tracking.
There are also ETFs that bet against an index or sector, performing well when the underlying assets falter. Unlike mutual funds, stock ETFs have low management fees and expense ratios, making them suitable for any investor aiming for low costs and steady returns. Remember, while ETFs were originally for long-term goals, you can trade them like stocks, including shorting or buying on margin. This broad access to equities or indexes makes stock ETFs highly diversified, reducing unsystematic risk in a simple, low-cost, tax-efficient package available through most online brokers.
Benefits of Stock Exchange-Traded Funds (ETFs)
Stock ETFs come with significant benefits, which is why their inflows keep growing. As of January 2024, the US ETF market manages $6.254 trillion in assets. They're a strong choice if you want to diversify flexibly, at low cost, and with tax efficiency. Research shows that passive investments like these often beat actively managed funds over the long haul.
Types of Stock Exchange-Traded Funds (ETFs)
Many popular stock ETFs track major indexes like the S&P 500 or Dow 30. Take the SPDR S&P 500 (SPY), which regularly sees over 80 million shares traded daily. Others use factor-based strategies considering things like market cap, momentum, or value—this is called Smart Beta, aiming for better risk-adjusted returns than standard indexes. Sector ETFs target specific industries such as energy, financials, or technology.
Breakdown of Various ETF Types
- Passive ETFs aim to replicate the performance of a broader index or trend.
- Actively Managed ETFs have portfolio managers deciding which securities to include.
- Bond ETFs provide regular income without a maturity date, based on underlying bond performance.
- Stock ETFs comprise a basket of stocks, including high performers and growth stocks, to track an industry or sector.
- Industry/Sector ETFs focus on a specific sector to capture its upside.
- Commodity ETFs invest in commodities without the costs of physical storage or insurance.
- Currency ETFs track pairs of domestic and foreign currencies.
- Bitcoin ETFs, including spot and futures versions, give crypto exposure without needing a wallet.
- Inverse ETFs earn gains from stock declines by shorting.
- Leveraged ETFs seek multiples of the underlying investment's return.
Exchange-Traded Fund FAQs
Are ETFs a good investment? They suit retail investors by offering broad market exposure without active management, though they require research and can lose value in downturns. What's the difference between an index fund and an ETF? Both track indexes like the S&P 500, but ETFs trade throughout the day, while other funds execute trades only at day's end. How do you choose the best ETFs? Use brokerage sites like Fidelity or Charles Schwab's ETF screener to filter by your desired characteristics.
The Bottom Line
Exchange-traded funds resemble mutual funds as baskets of securities providing cross-market exposure. Unlike other funds, you can trade ETFs throughout the day, adding flexibility to your investing.
Other articles for you
The Hawthorne Effect describes how people may alter their behavior simply because they know they are being observed in a study, though its validity is debated.
Monetarist theory posits that changes in the money supply primarily drive economic growth and business cycles.
This text explains what petroleum is, its economic and environmental roles, industry aspects, and investment strategies.
Gross Domestic Product (GDP) is a key measure of a country's economic health, encompassing consumer spending, government outlays, investments, and net exports.
Receivership is a process where a neutral receiver manages a distressed company's assets to aid creditors and avoid bankruptcy, differing from bankruptcy which protects debtors.
Convexity measures the curvature in the relationship between bond prices and yields, indicating how bond duration changes with interest rate fluctuations.
The average outstanding balance is the unpaid, interest-bearing portion of a loan or credit account averaged over a period, typically a month, used for interest calculations and credit assessments.
A bail-in is a method to rescue failing banks by making creditors and depositors absorb losses instead of using taxpayer money like in bailouts.
Dual Income, No Kids (DINK) describes households with two earners and no children, leading to higher disposable income and financial flexibility.
Accrued expenses are costs recognized in accounting before payment, essential for accurate financial reporting under accrual methods.