An Exchange-Traded Fund (ETF) is a type of investment fund traded on stock exchanges, much like individual stocks. ETFs hold a diversified portfolio of assets, such as stocks, bonds, commodities, or a combination, and aim to track the performance of a specific index or sector.
Diversification
ETFs provide exposure to a broad range of assets, reducing the risk associated with investing in a single stock or bond.
- Example: An S&P 500 ETF gives you a slice of all 500 companies in the index.
Liquidity
ETFs are traded throughout the trading day, just like stocks, allowing investors to buy or sell shares at market prices.
Cost-Effectiveness
- Low expense ratios compared to mutual funds due to passive management.
- No entry or exit loads like mutual funds, but you pay brokerage fees.
Transparency
ETFs disclose their holdings daily, offering investors clear insight into what they own.
Flexibility
- Can be used for various strategies, such as hedging, income generation, or international exposure.
- Options like leveraged and inverse ETFs allow for speculative strategies.