In investing, a fund that tracks a market index and trades throughout the day on a stock exchange is an exchange-traded fund, or ETF.
An ETF pools assets and issues shares that investors buy and sell in the market. Many ETFs are designed to follow an index, such as a broad stock-market index, rather than having a manager select every holding in an attempt to outperform the market. ETFs can also follow bonds, commodities, sectors, countries, or particular investment strategies.
The exchange-traded structure distinguishes ETFs from traditional open-end mutual funds, whose shares are generally bought from or redeemed with the fund at a price calculated once each business day. ETF market prices can move above or below the fund’s net asset value during trading, although creation-and-redemption mechanisms usually help keep prices near underlying value.
An ETF is not automatically diversified or low-risk. A narrowly focused, leveraged, inverse, or commodity-linked ETF can behave very differently from a broad index fund. Fees, spreads, taxes, and tracking differences also affect results.