What Is an ETF? Exchange-Traded Funds Explained

An ETF (exchange-traded fund) is a fund that holds a basket of assets, such as all the stocks in an index, and trades on a stock exchange like a single share. One purchase gives you exposure to everything the fund holds.

How an ETF works

Most ETFs track an index. An S&P 500 ETF holds the 500 stocks in the index in the same proportions, so its price moves in line with the index. You buy and sell ETF shares through a broker during market hours, at the market price, just like a stock.

Large institutions called authorised participants can create or redeem ETF shares in big blocks in exchange for the underlying assets. That process keeps the ETF’s market price close to the value of what it holds (its net asset value, or NAV).

ETF vs mutual fund vs stock

	ETF	Mutual fund	Single stock
Holds	A basket of assets	A basket of assets	One company
Trading	All day on an exchange	Once a day at NAV	All day on an exchange
Costs	Expense ratio, often low for index ETFs	Expense ratio, often higher	No ongoing fee
Diversification	Built in	Built in	None

ETF

Mutual fund

Single stock

Holds

A basket of assets

One company

Trading

All day on an exchange

Once a day at NAV

All day on an exchange

Costs

Expense ratio, often low for index ETFs

Expense ratio, often higher

No ongoing fee

Diversification

Built in

None

Expense ratio

ETFs charge an annual fee called the expense ratio, taken from the fund’s assets. A 0.10% expense ratio costs $10 a year per $10,000 invested. You don’t pay it separately; it’s reflected in the fund’s returns.

Types of ETF

Index ETFs: broad stock market indices like the S&P 500 or Nasdaq-100.
Sector and theme ETFs: technology, energy, healthcare and so on.
Bond ETFs, commodity ETFs (such as gold) and currency ETFs.
Leveraged and inverse ETFs: aim for a multiple (or the opposite) of an index’s daily move. Because they reset daily, their longer-term returns can differ a lot from the multiple you might expect.

Well-known ETFs on TradingView

AMEX:SPY tracks the S&P 500 and was the first US-listed ETF, launched in 1993. NASDAQ:QQQ tracks the Nasdaq-100 and AMEX:GLD holds gold. See how they compare with index and futures symbols on our S&P 500, Nasdaq 100 and gold pages, or build a list of ETFs with the watchlist builder.

Educational explanation only. ChartWatch is independent and doesn’t give trading or investment advice. Trading carries a risk of loss.

FAQ

What is an ETF in simple terms?

A fund that holds a basket of assets, like all the stocks in an index, and trades on an exchange like a single share.

What is the difference between an ETF and a mutual fund?

ETFs trade throughout the day on an exchange at market prices; mutual funds are bought and sold once a day at their net asset value.

What is an expense ratio?

The annual fee an ETF charges, as a percentage of your investment. It's deducted from the fund's assets rather than billed separately.

Do ETFs pay dividends?

Many do. ETFs that hold dividend-paying stocks usually pass those dividends on to shareholders.

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