What is an ETF? Definition
Exchange-Traded Funds, more commonly known as ETFs, are investment vehicles designed to emulate the performance of an underlying index, sector, or category of securities. They are akin to a basket of securities that investors can buy or sell through a brokerage firm on a stock exchange. This unique structure makes ETFs a popular tool for achieving affordable diversification and professionally managed portfolios.
ETFs: Passive Management and Broad Exposure
Unlike actively managed mutual funds, ETFs are generally passively managed, which means they aim to replicate the performance of a specific benchmark rather than outperform it. One famous example of this is the SPY ETF, which is structured to track the S&P 500 index. The company that creates the ETF, such as Barclays iShares in the case of SPY, constructs the ETF by buying the 500 stocks in the S&P 500. Investors then buy shares of the ETF to gain instant exposure to all these stocks and thus, indirectly track the performance of the S&P 500.
