Exchange Traded Fund (ETF)

Definition

The term exchange traded fund refers to shares issued by a financial institution that allow investors to trade in benchmark indices. Exchange traded funds may include a variety of assets such as stocks, bonds as well as commodities.

Explanation

An exchange traded fund, or ETF, is a marketable security that can trade on an exchange in the same manner as common stock. While a mutual fund has its Net Asset Value (NAV) calculated at the close of each trading session, an EFT's price changes throughout the trading day as the value of the underlying asset changes. This provides EFTs with the advantage of greater liquidity since they trade throughout the day. Transaction fees are typically lower than mutual funds, which can charge upfront loads approaching 6% of the investment dollars.

An ETF will attempt to mirror the returns provided by the benchmark they're replicating. This can include market indices, such as the S&P 500, as well as bonds and commodities such as oil, gold and currencies. Exchange traded funds allow investors to diversify their portfolios while providing them with flexibility such as the ability to sell shares short. Commissions and fees charged by brokers typically mirror those the investor would pay to trade in common stock.

Related Terms

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