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1. Shard Calculation

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Response:

Calculated Shard: 148 (from laksa090)

2. Crawled Status Check

Query:

curl -X POST \
  'http://laksa148.int.ahrefs:8124/' \
  -H 'Content-Type: text/plain' \
  -H 'X-ClickHouse-Database: crawler3' \
  -H 'Authorization: Basic YXBpOg==' \
  -d 'SELECT getAhrefsURLFromUnparsed(src_unparsed) AS found_url, ifNull(toUnixTimestamp(download_stamp), 0) AS crawl_time, ifNull(toUnixTimestamp(props_url_first_seen), 0) AS first_indexed_time, download_http_code AS http_code, src_unparsed AS src_unparsed, src_root_hash AS src_root_hash, history_drop_reason AS history_drop_reason, meta_title AS meta_title, meta_descriptions AS meta_descriptions, attrs_boilerpipe_text AS attrs_boilerpipe_text, attrs_markdown AS attrs_markdown, attrs_readable_markdown AS attrs_readable_markdown, meta_canonical AS meta_canonical FROM crawler3.page_info_local FINAL PREWHERE (src_root_hash, src_unparsed) IN ((getAhrefsRootHashFromUnparsed(getAhrefsUnparsedNoserviceFromURL(\'https://www.bankrate.com/investing/what-are-etfs/\')), getAhrefsUnparsedNoserviceFromURL(\'https://www.bankrate.com/investing/what-are-etfs/\'))) FORMAT JSONEachRow'

Response:

{"found_url":"https:\/\/www.bankrate.com\/investing\/what-are-etfs\/","crawl_time":1775756256,"first_indexed_time":1546031898,"http_code":200,"src_unparsed":"com,bankrate!www,\/investing\/what-are-etfs\/ s443","src_root_hash":"16841441868536461148","history_drop_reason":null,"meta_title":"What is an ETF? (Exchange-Traded Fund) | Bankrate","meta_descriptions":["ETFs are a type of fund that owns various kinds of securities, often of one type. Here’s what you need to know about ETFs and why investors like them.","ETFs are a type of fund that owns various kinds of securities, often of one type. Here’s what you need to know about ETFs and why investors like them."],"attrs_boilerpipe_text":"Exchange-traded funds, or ETFs, are one of the hottest investing trends of the last two decades. ETFs held about $11 trillion in assets at year-end 2023, according to research conducted by TrackInsight in collaboration with J.P. Morgan, reaching historic highs for the fast-growing asset class. ETFs allow investors to buy a collection of assets in just one fund, and they trade on an exchange like a stock. They’re popular because they meet the needs of investors, and usually for low cost.\nHere’s what you need to know about ETFs and why so many investors are drawn to them.\nWhat is an ETF and how does it work?\nETFs are a type of fund that owns various kinds of securities, often of one type. For example, a stock ETF holds stocks, while a bond ETF holds bonds. One share of the ETF gives buyers ownership of all the stocks or bonds in the fund. For example, if an ETF held 100 stocks, then those who owned the fund would own a stake — a very tiny one — in each of those 100 stocks.\nETFs are typically passively managed\n, meaning that the fund usually holds a fixed number of securities based on a specific preset index of investments. In contrast, many mutual funds are actively managed, with professional investors trying to select the investments that will rise and fall.\nFor example, the\nStandard & Poor’s 500 index\nis perhaps the world’s best-known index, and it forms the basis of many ETFs. Other popular indexes include the Dow Jones Industrial Average and the\nNasdaq Composite index\n. ETFs based on these funds — they’re called index funds — just buy and hold whatever is in the index and make no active trading decisions.\nETFs trade on a stock exchange during the day, unlike mutual funds that trade only after the market closes. With an ETF, you can place a trade whenever the market is open and know exactly the price you’re paying for the fund.\nFor these benefits, ETFs charge an\nexpense ratio\n, which is the fee paid by investors for managing the fund. The advent of ETFs has caused the expense ratios of both mutual funds and ETFs to fall drastically over time, as cheap passively managed ETFs became popular.\nWhat are the major types of ETFs?\nETFs come in a variety of flavors that cater to the needs of investors. ETFs chop up the market into industries, investment themes, valuation and other characteristics that investors care about.\nHere are some of the most popular ETF categories and what they include.\nValue stocks\nStocks that look cheap relative to their earnings or assets.\nValue ETFs\nare the funds that hold these stocks.\nIndustry\nSecurities from companies in a specific industry, such as consumer goods.\nMajor indexes\nStocks based on a major index such as the S&P 500 or the Nasdaq 100.\nCountry\nStocks with substantial exposure to a given country.\nCompany size\nOwn companies of a given size, typically either small, medium or large.\nBonds\nBonds sliced by any number of characteristics, including safety, duration and issuer.\nCommodity\nInvestments in physical commodities (\ngold, for example\n) or producers of it.\nInverse\nInverse ETFs\ngo up when the price of the holdings go down, allowing investors to profit on the decline of securities.\nFund managers can dissect the market into almost any number of characteristics if they think investors will be interested in buying the end product.\nPros and cons of ETFs\nETFs offer a number of important advantages to investors, especially in terms of investment choice, ease, and expense. But ETFs are also valuable because they allow investors to “slice and dice” the investing universe and gain exposure to specific investing “themes.”\nPros\nInvestment choice:\nETFs give investors new investment choices, because they create new securities as funds. With an ETF, you can\ninvest in an S&P 500 index fund\nright on the exchange, rather than having to buy a small piece of each stock.\nDiversification:\nETFs allow investors to easily achieve objectives\nsuch as diversification\n. One fund can provide instant diversification, either across an industry or across the entire market. Investors can easily buy multiple funds that target each sector they’d like to own.\nLow cost:\nETFs can be relatively cheap as well, and they’ve only gotten cheaper over time. The asset-weighted average expense ratio of a stock index ETF was 0.14 percent in 2024, according to the Investment Company Institute, and the number has been falling for the last decade. It was even cheaper for bond index ETFs, with an expense ratio of just 0.10 percent. The\nbest index funds\n, such as those based on the S&P 500, go for much cheaper than that even. The Vanguard S&P 500 ETF (VOO), for example, costs 0.03 percent.\nFocused investments:\nETFs are also popular because they allow investors to create exposure to specific sectors or investing themes. For example, ETFs can focus on high-yield stocks or value-priced stocks. They can target biotech stocks or\ncompanies with exposure to Brazil or India\n, for example.\nMore tax-efficient:\nETFs are structured so that they make only minimal distributions of capital gains, keeping tax liabilities lower for investors.\nCons of ETFs\nCan be overvalued:\nETFs can trade at a higher\nnet asset value\nthan their individual holdings. That is, investors may be able to pay more for the ETF than it actually owns. That said, this situation doesn’t happen often and the spread is rarely wide, but it can happen. In contrast, mutual funds always trade at their net asset value.\nNot as focused as advertised:\nETFs do not always offer the level of targeted exposure that they claim to. For example, some ETFs provide exposure to certain countries, and they’ll own companies based in that area. The issue is that often the large companies that comprise much of the fund earn a large portion of their sales from outside the targeted area. For instance, imagine an ETF that gives focused exposure to England, and to do so it owns, among many other companies, a stake in a British-based company such as Diageo, a maker of spirits. But Diageo also earns a huge percentage of its sales from outside the country. So an ETF can be much less focused on a specific niche than you would believe, given the fund’s name and purported target. So you often have to look into a fund’s holdings to understand what you actually own.\nETFs vs. mutual funds\nWhile mutual funds and ETFs have similar goals to own a wide variety of assets in one security,\nthey have many key differences\n, and those differences have helped ETFs thrive, especially in the last decade. Here are some of the main areas where these two kinds of funds differ.\nCategory\nMutual fund\nETF\nAverage annual expense (2024)*\n0.64 percent for actively managed stock funds; 0.47 for active bond funds; stock and bond index funds average 0.05 percent\n0.14 percent asset-weighted average for stock funds; 0.10 percent for bond funds\nCommission\nMay run as high as $50 at major brokers, though many brokers offer free trades on select funds\nFree at major online brokers\nInitial minimum\nOften a few thousand dollars unless purchased as part of a\n401(k)\nor other retirement plan\nUsually just the cost of a single share, sometimes just $10 or $20, depending on the fund\nManagement style\nActive and passive\nMainly passive\nWhen does it trade?\nAfter the market closes\nWhen the exchange is open\nInvestment strategies\nAll kinds, value stocks, dividend stocks, bonds, indexes, etc.\nAll kinds, value stocks, dividend stocks, bonds, indexes, etc.\n \n \n*According to the Investment Company Institute\nThe passive strategy used primarily by ETFs keeps management fees low, and this low cost is passed on to consumers in the form of low expense ratios. Over time, that’s put pressure on the expense ratios of mutual funds to come down in order to compete.\nETFs vs. stocks\nWhile ETFs and\nstocks\nboth trade throughout the day, there are some key differences between the two types of securities.\nA stock represents an ownership interest in a single company while an ETF holds a number of different stocks or other assets. A stock ETF may hold stock in hundreds of different companies, allowing its investors to hold a diversified portfolio by owning just one security: the ETF.\nThat diversification reduces the risk for investors, compared to holding a single stock or just a few individual stocks. An ETF is generally less volatile than an individual stock, as well.\nAre ETFs good for beginners?\nETFs are popular because they offer investors\na lot of valuable traits\n. And that’s especially\ngood for beginning investors\n.\nLow minimum investment:\nThe minimums for ETFs are usually the cost of just one share, which can vary from very little to perhaps a couple hundred dollars. Compare that with the minimum initial investment for a mutual fund, which might run into the thousands. And some brokers will even allow you\nto buy fractions of shares\n, so you don’t even need enough for a full share to get started.\nUsually commission-free:\nOn top of that, many brokers allow you to trade ETFs without a commission.\nCharles Schwab\nand Fidelity are notable examples, but\nRobinhood\nalso offers all the ETFs on its platform without a trading fee. So you can get in the game at a very low cost.\nThematic:\nETFs also allow investors to\nbuy into a specific investing theme\neasily, even if they don’t know much about it. If you’re not a biotech expert, a focused biotech ETF will give you exposure to the industry, so you don’t have to pick and choose which companies are the winners.\nDiversification:\nETFs also offer instant diversification. You can buy one fund and own a specific set of companies that are focused on one area of the market, or even own the whole market. In either case, you get diversification and\nthe risk reduction that comes with it\n.\nOwn the market:\nFinally, ETFs also allow you to buy popular indexes such as the S&P 500, letting you “own the market” and get the market return, which has averaged about 10 percent annually over time. It’s incredibly easy for investors to buy such an ETF and enjoy the market average with little investing work.\nHere are\nsome top ETFs\nto consider this year.\nAre ETFs a good investment?\nHow an ETF performs depends entirely on the stocks, bonds and other assets that it’s invested in. If the fund’s investments rise, then the ETF will rise as well. If its investments fall in value, the ETF’s price will fall, too. In short, the performance of the ETF is just a weighted average of all its holdings. So not all ETFs are created equal, and it’s important to know what your ETF is invested in.\nBut the structure of an ETF is a good setup for investors, largely due to their low costs.\nETFs tend to have low expense ratios — the cheapest funds cost just a few dollars annually for each $10,000 invested. In large part, that’s because they’re passive investments, meaning that they use preset indexes to determine what they own, rather than paying high-priced investment managers to actively scour the market for the best holdings. The goal of a passive ETF is to track the performance of the index that it follows, not beat it.\nIn addition, ETFs also give you all the benefits listed above: low investment minimums, diversification, a focused or thematic investment and a wide choice of funds.\nBottom line\nETFs have proven incredibly popular in the last few decades, and that popularity is set to continue. One of the most popular investing strategies — buying and holding an S&P 500 index fund — has been\nrecommended by legendary investor Warren Buffett\n. While the influx of cash to ETFs might hiccup when the market fluctuates, the long-term trend toward ETF investing looks clear.\nEditorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.\nDid you find this page helpful?\nInfo Icon\nHelp us improve our content","attrs_markdown":"[Skip to Main Content](https:\/\/www.bankrate.com\/investing\/what-are-etfs\/#main-content)\n\n- [Banking](https:\/\/www.bankrate.com\/banking\/)\n  All\n  \n  Banking\n  \n  Checking & savings\n  \n  CDs\n  \n  Money market\n  \n  Banks\n  \n  [Explore all banking resources](https:\/\/www.bankrate.com\/banking\/)\n  \n  Banking\n  \n  Compare accounts\n  \n  - [Best high-yield savings accounts](https:\/\/www.bankrate.com\/banking\/savings\/best-high-yield-interests-savings-accounts\/)\n  - [Best checking accounts](https:\/\/www.bankrate.com\/banking\/checking\/best-checking-accounts\/)\n  - [Best free checking accounts](https:\/\/www.bankrate.com\/banking\/checking\/best-free-checking-accounts\/)\n  \n  Get guidance\n  \n  - [Savings calculator](https:\/\/www.bankrate.com\/banking\/savings\/simple-savings-calculator\/)\n  - 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[![](https:\/\/www.bankrate.com\/f\/102997\/1440x1440\/38750a2d5a\/what-is-a-certified-financial-planner-s.png\/m\/50x50\/filters:quality\$90\$:format\$webp\$) Pros & cons of financial advising 7 min read](https:\/\/www.bankrate.com\/investing\/financial-advisors\/pros-cons-financial-advisor\/)\n  \n  [Explore all investing resources](https:\/\/www.bankrate.com\/investing\/)\n- [Credit cards](https:\/\/www.bankrate.com\/credit-cards\/)\n  All\n  \n  Credit cards\n  \n  Cards by category\n  \n  Cards by credit\n  \n  Tools & reviews\n  \n  Guides & resources\n  \n  [Explore all credit cards resources](https:\/\/www.bankrate.com\/credit-cards\/)\n  \n  Credit cards\n  \n  Compare cards\n  \n  - [Best cards of 2026](https:\/\/www.bankrate.com\/credit-cards\/best-credit-cards\/)\n  - [Best cash back cards](https:\/\/www.bankrate.com\/credit-cards\/cash-back\/best-cash-back-cards\/)\n  - [Best balance transfer cards](https:\/\/www.bankrate.com\/credit-cards\/balance-transfer\/best-balance-transfer-cards\/)\n  - 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[![](https:\/\/www.bankrate.com\/f\/102997\/1440x1440\/4c26764452\/how-to-start-saving.png\/m\/50x50\/filters:quality\$90\$:format\$webp\$) How to get a personal loan 11 min read](https:\/\/www.bankrate.com\/loans\/personal-loans\/how-to-get-personal-loan\/)\n  \n  Compare lenders\n  \n  - [Best auto loans](https:\/\/www.bankrate.com\/loans\/auto-loans\/rates\/)\n  - [Best auto loan refinance rates](https:\/\/www.bankrate.com\/loans\/auto-loans\/refinance-rates\/)\n  - [Best car loans for bad credit](https:\/\/www.bankrate.com\/loans\/auto-loans\/bad-credit-loans\/)\n  \n  Get guidance\n  \n  - [Auto loan resources](https:\/\/www.bankrate.com\/loans\/auto-loans\/)\n  - [Auto loan lender reviews](https:\/\/www.bankrate.com\/loans\/auto-loans\/reviews\/)\n  - [Auto loan calculator](https:\/\/www.bankrate.com\/loans\/auto-loans\/auto-loan-calculator\/)\n  - [Auto loan refinancing guide](https:\/\/www.bankrate.com\/loans\/auto-loans\/how-to-refinance-car-loan\/)\n  \n  - [![](https:\/\/www.bankrate.com\/f\/102997\/1440x1440\/d1a328a134\/auto-loan-refinancing-guide-nav.png\/m\/50x50\/filters:quality\$90\$:format\$webp\$) How to get the best auto loan rate 10 min read](https:\/\/www.bankrate.com\/loans\/auto-loans\/how-to-get-the-best-auto-loan-rate\/)\n  - [![](https:\/\/www.bankrate.com\/f\/102997\/720x720\/c481afa0d2\/auto-loan-refinancing-guide-s.jpg\/m\/50x50\/filters:quality\$90\$:format\$webp\$) Auto loan basics 5 min read](https:\/\/www.bankrate.com\/loans\/auto-loans\/what-is-an-auto-loan\/)\n  \n  Compare lenders\n  \n  - [Student loan rates](https:\/\/www.bankrate.com\/loans\/student-loans\/rates\/)\n  - [Student loan refinancing rates](https:\/\/www.bankrate.com\/loans\/student-loans\/refinance-rates\/)\n  - [Best bad credit student loans](https:\/\/www.bankrate.com\/loans\/student-loans\/bad-credit-loans\/)\n  \n  Get guidance\n  \n  - [Student loan resources](https:\/\/www.bankrate.com\/loans\/student-loans\/)\n  - [Student loan lender reviews](https:\/\/www.bankrate.com\/loans\/student-loans\/reviews\/)\n  - [Student loan calculator](https:\/\/www.bankrate.com\/loans\/student-loans\/student-loan-calculator\/)\n  - [Student loan refinance calculator](https:\/\/www.bankrate.com\/loans\/student-loans\/student-loan-refinance-calculator\/)\n  \n  - [![](https:\/\/www.bankrate.com\/f\/102997\/1440x1440\/3d6f458d84\/how-to-start-investing-nav-imagery.png\/m\/50x50\/filters:quality\$90\$:format\$webp\$) Private student loan basics 10 min read](https:\/\/www.bankrate.com\/loans\/student-loans\/private-student-loans-guide\/)\n  - [![](https:\/\/www.bankrate.com\/f\/102997\/1440x1440\/4c26764452\/how-to-start-saving.png\/m\/50x50\/filters:quality\$90\$:format\$webp\$) How to get a student loan 11 min read](https:\/\/www.bankrate.com\/loans\/student-loans\/how-to-get-student-loan\/)\n  \n  Compare lenders\n  \n  - [Best small business loans](https:\/\/www.bankrate.com\/loans\/small-business\/best-small-business-loans\/)\n  - [Bad credit small business loans](https:\/\/www.bankrate.com\/loans\/small-business\/bad-credit-business-loans\/)\n  - [Business lines of credit](https:\/\/www.bankrate.com\/loans\/small-business\/business-line-of-credit\/)\n  - [Small business loan banks](https:\/\/www.bankrate.com\/loans\/small-business\/best-banks-for-small-business-loans\/)\n  \n  Get guidance\n  \n  - 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[Best HELOC lenders](https:\/\/www.bankrate.com\/home-equity\/heloc-lenders\/)\n  - [HELOC calculator](https:\/\/www.bankrate.com\/home-equity\/heloc-calculator\/)\n  - [What is a HELOC?](https:\/\/www.bankrate.com\/home-equity\/what-is-heloc\/)\n  - [Pros and cons of HELOCs](https:\/\/www.bankrate.com\/home-equity\/pros-cons-of-home-equity-lines\/)\n  - [Home equity lender reviews](https:\/\/www.bankrate.com\/home-equity\/reviews\/)\n  \n  - [![](https:\/\/www.bankrate.com\/f\/102997\/1440x1440\/e9e92b7729\/home-equity-heloc-guide-nav-imagery.png\/m\/50x50\/filters:quality\$90\$:format\$webp\$) What is home equity? 8 min read](https:\/\/www.bankrate.com\/home-equity\/what-is-home-equity\/)\n  - [![Home purchase](https:\/\/www.bankrate.com\/f\/102997\/1280x720\/98576f9f53\/home-purchase.jpeg\/m\/50x50\/filters:quality\$90\$:format\$webp\$) How to calculate home equity 6 min read](https:\/\/www.bankrate.com\/home-equity\/how-to-calculate-equity-in-your-home\/)\n  \n  Home equity loans\n  \n  Home equity loans let you borrow a lump sum at a fixed rate, based on how much of the home you own outright.\n  \n  [Home equity loan rates](https:\/\/www.bankrate.com\/home-equity\/home-equity-loan-rates\/)\n  \n  Get guidance\n  \n  - [What is a home equity loan?](https:\/\/www.bankrate.com\/home-equity\/what-is-home-equity-loan\/)\n  - [Home equity loan pros and cons](https:\/\/www.bankrate.com\/home-equity\/pros-cons-home-equity-loan\/)\n  - [Home equity loan requirements](https:\/\/www.bankrate.com\/home-equity\/requirements-to-borrow-from-home-equity\/)\n  - [HELOC vs home equity loan](https:\/\/www.bankrate.com\/home-equity\/home-equity-loan-vs-line-of-credit\/)\n  - [How to build home equity](https:\/\/www.bankrate.com\/home-equity\/how-to-build-equity-in-your-home\/)\n  \n  - [![](https:\/\/www.bankrate.com\/f\/102997\/721x720\/bad3fd8f56\/heloc-lender-reviews-s.jpg\/m\/50x50\/filters:quality\$90\$:format\$webp\$) Best home equity loan lenders Compare top home equity lenders](https:\/\/www.bankrate.com\/home-equity\/home-equity-loan-lenders\/)\n  - [![CD Rates](https:\/\/www.bankrate.com\/f\/102997\/1920x1080\/2654611691\/cd-rates.jpeg\/m\/50x50\/filters:quality\$90\$:format\$webp\$) Home equity calculator Calculate how much you can borrow](https:\/\/www.bankrate.com\/home-equity\/home-equity-calculator\/)\n  \n  [Explore all home equity resources](https:\/\/www.bankrate.com\/home-equity\/)\n- [Insurance](https:\/\/www.bankrate.com\/insurance\/)\n  All\n  \n  Insurance\n  \n  Auto insurance\n  \n  Home insurance\n  \n  Tools & reviews\n  \n  [Explore all insurance resources](https:\/\/www.bankrate.com\/insurance\/)\n  \n  Insurance\n  \n  Compare rates\n  \n  - [Car insurance quotes](https:\/\/www.bankrate.com\/insurance\/car\/car-insurance-quotes\/)\n  - [Best car insurance companies](https:\/\/www.bankrate.com\/insurance\/car\/best-car-insurance-companies\/)\n  - [Cheapest car insurance companies](https:\/\/www.bankrate.com\/insurance\/car\/cheap-car-insurance-companies\/)\n  - [Compare car insurance rates](https:\/\/www.bankrate.com\/insurance\/car\/average-cost-of-car-insurance\/)\n  \n  Popular states\n  \n  - [California](https:\/\/www.bankrate.com\/insurance\/car\/california\/)\n  - [Florida](https:\/\/www.bankrate.com\/insurance\/car\/florida\/)\n  - [Texas](https:\/\/www.bankrate.com\/insurance\/car\/texas\/)\n  - [Ohio](https:\/\/www.bankrate.com\/insurance\/car\/ohio\/)\n  - [Auto insurance by state](https:\/\/www.bankrate.com\/insurance\/car\/states\/)\n  \n  - [![Person smiling while sitting in car](https:\/\/www.bankrate.com\/f\/102997\/1440x1440\/5bfb00cc0b\/auto-insurance-by-state.png\/m\/50x50\/filters:quality\$90\$:format\$webp\$) How much is car insurance? 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[Investing](https:\/\/www.bankrate.com\/investing\/)  ›\n2. What is an ETF? Learn about exchange-traded funds\n\nAdvertiser Disclosure\n\n# What is an ETF? Learn about exchange-traded funds\n![James Royal, Ph.D.](https:\/\/www.bankrate.com\/2021\/10\/26151853\/James-Royal-headshot-scaled-square.jpg?auto=webp&quality=85&width=24&height=24&fit=cover&enable=upscale&crop=1:1,smart) ![Brian Beers](https:\/\/www.bankrate.com\/2019\/05\/06102103\/b-beers-headshot1.jpg?auto=webp&quality=85&width=24&height=24&fit=cover&enable=upscale&crop=1:1,smart) ![Kenneth Chavis IV](https:\/\/www.bankrate.com\/brp\/2025\/01\/24125453\/VCM-Headshot.jpg?auto=webp&quality=85&width=24&height=24&fit=cover&enable=upscale&crop=1:1,smart)\n\nWritten by\n\nJames Royal, Ph.D.\n\n,\n\n![](https:\/\/www.bankrate.com\/2021\/10\/26151853\/James-Royal-headshot-scaled-square.jpg?auto=webp&quality=85&width=64&height=64&fit=cover&enable=upscale&crop=1:1,smart)\n\n[James Royal, Ph.D.](https:\/\/www.bankrate.com\/authors\/james-royal\/)\n\nFormer Principal Writer, Investing and Wealth Management\n\nExpertise\n\n- •  Investing\n- •  Wealth management\n\nFormer Bankrate principal writer and editor James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more.\n\n[Read more](https:\/\/www.bankrate.com\/authors\/james-royal\/)\n\n- [Connect with James Royal, Ph.D. on Twitter](https:\/\/twitter.com\/JimRoyalPhD)\n- [Connect with James Royal, Ph.D. on LinkedIn](https:\/\/www.linkedin.com\/in\/james-royal-phd-809b929\/)\n- [Get in contact with James Royal, Ph.D. via Email](mailto:jroyal@redventures.com)\n\nClose\n\n[James Royal, Ph.D.](https:\/\/www.bankrate.com\/authors\/james-royal\/),\n\nEdited by\n\nBrian Beers\n\n,\n\n![](https:\/\/www.bankrate.com\/2019\/05\/06102103\/b-beers-headshot1.jpg?auto=webp&quality=85&width=64&height=64&fit=cover&enable=upscale&crop=1:1,smart)\n\n[Brian Beers](https:\/\/www.bankrate.com\/authors\/brian-beers\/)\n\nFormer Managing Editor\n\nExpertise\n\n- •  Investing\n- •  Banking\n\nBrian Beers is a former managing editor for Bankrate. He oversaw editorial coverage of banking, investing, the economy and all things money.\n\n[Read more](https:\/\/www.bankrate.com\/authors\/brian-beers\/)\n\n- [Connect with Brian Beers on Twitter](https:\/\/twitter.com\/brian_beers)\n- [Connect with Brian Beers on LinkedIn](https:\/\/www.linkedin.com\/in\/brian-beers\/)\n\nClose\n\n[Brian Beers](https:\/\/www.bankrate.com\/authors\/brian-beers\/),\n\nReviewed by\n\nKenneth Chavis IV\n\n,\n\n![](https:\/\/www.bankrate.com\/brp\/2025\/01\/24125453\/VCM-Headshot.jpg?auto=webp&quality=85&width=64&height=64&fit=cover&enable=upscale&crop=1:1,smart)\n\n[Kenneth Chavis IV](https:\/\/www.bankrate.com\/authors\/kenneth-chavis-iv\/)\n\nSenior wealth advisor at Versant Capital Management\n\nExpertise\n\n- •  Investing and retirement\n- •  Mortgages and real estate\n\nKenneth Chavis IV is a senior wealth counselor at Versant Capital Management who provides investment management, complex wealth strategy, financial planning and tax advice to business owners, executives, medical doctors, and more.\n\n[Read more](https:\/\/www.bankrate.com\/authors\/kenneth-chavis-iv\/)\n\n[About our review board](https:\/\/www.bankrate.com\/financial-review-board\/)\n\nClose\n\n[Kenneth Chavis IV](https:\/\/www.bankrate.com\/authors\/kenneth-chavis-iv\/),\n\nExpert verified\n\nHow is this page expert verified?\n\nAt Bankrate, we take the accuracy of our content seriously.\n\n“Expert verified” means that our Financial Review Board thoroughly evaluated the article for accuracy and clarity. The Review Board comprises a panel of financial experts whose objective is to ensure that our content is always objective and balanced.\n\nTheir reviews hold us accountable for publishing high-quality and trustworthy content.\n\n[About our Review Board](https:\/\/www.bankrate.com\/financial-review-board\/)\n\nClose\n\n[Expert verified](https:\/\/www.bankrate.com\/financial-review-board\/)\n\nPublished on April 18, 2025 \\| 7 min read\n\nBankrate is always editorially independent. While we adhere to strict editorial integrity , this post may contain references to products from our partners. Here's an explanation for how we make money . Our Bankrate promise is to ensure everything we publish is objective, accurate and trustworthy.\n\n![Person being lifted into the air by balloons. Across each balloon is a letter, spelling out ETF?](https:\/\/www.bankrate.com\/brp\/2024\/03\/17182855\/Investments_What-is-an-ETF_-Learn-about-exchange-traded-funds.jpg?auto=webp&optimize=high&crop=16:9)\n\nImages by Getty Images; Illustration by Issiah Davis\/Bankrate\n\nTable of contents\n\n- [What is an ETF and how does it work?](https:\/\/www.bankrate.com\/investing\/what-are-etfs\/#what-is)\n- [Types of ETFs](https:\/\/www.bankrate.com\/investing\/what-are-etfs\/#types)\n- [Pros and cons of ETFs](https:\/\/www.bankrate.com\/investing\/what-are-etfs\/#pros-cons)\n- [ETFs vs. mutual funds](https:\/\/www.bankrate.com\/investing\/what-are-etfs\/#v-mutual)\n- [ETFs vs. stocks](https:\/\/www.bankrate.com\/investing\/what-are-etfs\/#v-stocks)\n- [Are ETFs good for beginners?](https:\/\/www.bankrate.com\/investing\/what-are-etfs\/#beginners)\n- [Are ETFs a good investment?](https:\/\/www.bankrate.com\/investing\/what-are-etfs\/#good)\n\nTable of contents\n\nBack to top\n\nExchange-traded funds, or ETFs, are one of the hottest investing trends of the last two decades. ETFs held about \\$11 trillion in assets at year-end 2023, according to research conducted by TrackInsight in collaboration with J.P. Morgan, reaching historic highs for the fast-growing asset class. ETFs allow investors to buy a collection of assets in just one fund, and they trade on an exchange like a stock. They’re popular because they meet the needs of investors, and usually for low cost.\n\nHere’s what you need to know about ETFs and why so many investors are drawn to them.\n\n##\n![](https:\/\/navi.cohesionapps.com\/display?write_key=wk_2M3TlVcWbz8i1RTZjLkSmbWfyQC&adId=a7c8c4b068&req=https%3A%2F%2Fwww.bankrate.com%2Finvesting%2Fwhat-are-etfs%2F&ref=)\n\n## What is an ETF and how does it work?\nETFs are a type of fund that owns various kinds of securities, often of one type. For example, a stock ETF holds stocks, while a bond ETF holds bonds. One share of the ETF gives buyers ownership of all the stocks or bonds in the fund. For example, if an ETF held 100 stocks, then those who owned the fund would own a stake — a very tiny one — in each of those 100 stocks.\n\n[ETFs are typically passively managed](https:\/\/www.bankrate.com\/investing\/active-versus-passive\/), meaning that the fund usually holds a fixed number of securities based on a specific preset index of investments. In contrast, many mutual funds are actively managed, with professional investors trying to select the investments that will rise and fall.\n\nFor example, the [Standard & Poor’s 500 index](https:\/\/www.bankrate.com\/investing\/what-is-sp-500\/) is perhaps the world’s best-known index, and it forms the basis of many ETFs. Other popular indexes include the Dow Jones Industrial Average and the [Nasdaq Composite index](https:\/\/www.bankrate.com\/investing\/what-is-nasdaq-composite\/#:~:text=The%20Nasdaq%20Composite%20is%20an,number%20of%20technology-related%20companies.). ETFs based on these funds — they’re called index funds — just buy and hold whatever is in the index and make no active trading decisions.\n\nETFs trade on a stock exchange during the day, unlike mutual funds that trade only after the market closes. With an ETF, you can place a trade whenever the market is open and know exactly the price you’re paying for the fund.\n\nFor these benefits, ETFs charge an [expense ratio](https:\/\/www.bankrate.com\/investing\/what-is-an-expense-ratio\/), which is the fee paid by investors for managing the fund. The advent of ETFs has caused the expense ratios of both mutual funds and ETFs to fall drastically over time, as cheap passively managed ETFs became popular.\n\n##\n## What are the major types of ETFs?\nETFs come in a variety of flavors that cater to the needs of investors. ETFs chop up the market into industries, investment themes, valuation and other characteristics that investors care about.\n\nHere are some of the most popular ETF categories and what they include.\n\nValue stocks\n\nStocks that look cheap relative to their earnings or assets. [Value ETFs](https:\/\/www.bankrate.com\/investing\/best-value-etfs\/) are the funds that hold these stocks.\n\nDividend stocks\n\n[Stocks that pay a dividend](https:\/\/www.bankrate.com\/investing\/high-dividend-stocks\/) or have a strong payout record. Here are some of the [best dividend ETFs](https:\/\/www.bankrate.com\/investing\/best-dividend-etfs\/).\n\nIndustry\n\nSecurities from companies in a specific industry, such as consumer goods.\n\nMajor indexes\n\nStocks based on a major index such as the S\\&P 500 or the Nasdaq 100.\n\nCountry\n\nStocks with substantial exposure to a given country.\n\nCompany size\n\nOwn companies of a given size, typically either small, medium or large.\n\nBonds\n\nBonds sliced by any number of characteristics, including safety, duration and issuer.\n\nCommodity\n\nInvestments in physical commodities ([gold, for example](https:\/\/www.bankrate.com\/investing\/best-gold-etfs\/)) or producers of it.\n\nInverse\n\n[Inverse ETFs](https:\/\/www.bankrate.com\/investing\/best-inverse-etfs\/) go up when the price of the holdings go down, allowing investors to profit on the decline of securities.\n\nFund managers can dissect the market into almost any number of characteristics if they think investors will be interested in buying the end product.\n\n##\n## Pros and cons of ETFs\nETFs offer a number of important advantages to investors, especially in terms of investment choice, ease, and expense. But ETFs are also valuable because they allow investors to “slice and dice” the investing universe and gain exposure to specific investing “themes.”\n\n### Pros\n- **Investment choice:** ETFs give investors new investment choices, because they create new securities as funds. With an ETF, you can [invest in an S\\&P 500 index fund](https:\/\/www.bankrate.com\/investing\/how-to-buy-sp-500-index-fund\/) right on the exchange, rather than having to buy a small piece of each stock.\n- **Diversification:** ETFs allow investors to easily achieve objectives [such as diversification](https:\/\/www.bankrate.com\/investing\/diversification-is-important-in-investing\/). One fund can provide instant diversification, either across an industry or across the entire market. Investors can easily buy multiple funds that target each sector they’d like to own.\n- **Low cost:** ETFs can be relatively cheap as well, and they’ve only gotten cheaper over time. The asset-weighted average expense ratio of a stock index ETF was 0.14 percent in 2024, according to the Investment Company Institute, and the number has been falling for the last decade. It was even cheaper for bond index ETFs, with an expense ratio of just 0.10 percent. The [best index funds](https:\/\/www.bankrate.com\/investing\/best-index-funds\/), such as those based on the S\\&P 500, go for much cheaper than that even. The Vanguard S\\&P 500 ETF (VOO), for example, costs 0.03 percent.\n- **Focused investments:** ETFs are also popular because they allow investors to create exposure to specific sectors or investing themes. For example, ETFs can focus on high-yield stocks or value-priced stocks. They can target biotech stocks or [companies with exposure to Brazil or India](https:\/\/www.bankrate.com\/investing\/how-to-invest-in-etfs\/), for example.\n- **More tax-efficient:** ETFs are structured so that they make only minimal distributions of capital gains, keeping tax liabilities lower for investors.\n### Cons of ETFs\n- **Can be overvalued:** ETFs can trade at a higher [net asset value](https:\/\/www.bankrate.com\/investing\/what-is-net-asset-value\/) than their individual holdings. That is, investors may be able to pay more for the ETF than it actually owns. That said, this situation doesn’t happen often and the spread is rarely wide, but it can happen. In contrast, mutual funds always trade at their net asset value.\n- **Not as focused as advertised:** ETFs do not always offer the level of targeted exposure that they claim to. For example, some ETFs provide exposure to certain countries, and they’ll own companies based in that area. The issue is that often the large companies that comprise much of the fund earn a large portion of their sales from outside the targeted area. For instance, imagine an ETF that gives focused exposure to England, and to do so it owns, among many other companies, a stake in a British-based company such as Diageo, a maker of spirits. But Diageo also earns a huge percentage of its sales from outside the country. So an ETF can be much less focused on a specific niche than you would believe, given the fund’s name and purported target. So you often have to look into a fund’s holdings to understand what you actually own.\n\n![](https:\/\/navi.cohesionapps.com\/display?write_key=wk_2M3TlVcWbz8i1RTZjLkSmbWfyQC&adId=a3886bfd52&req=https%3A%2F%2Fwww.bankrate.com%2Finvesting%2Fwhat-are-etfs%2F&ref=)\n\n##\n## ETFs vs. mutual funds\nWhile mutual funds and ETFs have similar goals to own a wide variety of assets in one security, [they have many key differences](https:\/\/www.bankrate.com\/investing\/mutual-fund-vs-etf-which-is-better\/), and those differences have helped ETFs thrive, especially in the last decade. Here are some of the main areas where these two kinds of funds differ.\n\n| Category | Mutual fund | ETF |\n|---|---|---|\n| **Average annual expense (2024)\\*** | 0\\.64 percent for actively managed stock funds; 0.47 for active bond funds; stock and bond index funds average 0.05 percent | 0\\.14 percent asset-weighted average for stock funds; 0.10 percent for bond funds |\n| **Commission** | May run as high as \\$50 at major brokers, though many brokers offer free trades on select funds | Free at major online brokers |\n| **Initial minimum** | Often a few thousand dollars unless purchased as part of a [401(k)](https:\/\/www.bankrate.com\/retirement\/401k\/) or other retirement plan | Usually just the cost of a single share, sometimes just \\$10 or \\$20, depending on the fund |\n| **Management style** | Active and passive | Mainly passive |\n| **When does it trade?** | After the market closes | When the exchange is open |\n| **Investment strategies** | All kinds, value stocks, dividend stocks, bonds, indexes, etc. | All kinds, value stocks, dividend stocks, bonds, indexes, etc. |\n|   |   | *\\*According to the Investment Company Institute* |\n\nThe passive strategy used primarily by ETFs keeps management fees low, and this low cost is passed on to consumers in the form of low expense ratios. Over time, that’s put pressure on the expense ratios of mutual funds to come down in order to compete.\n\n##\n## ETFs vs. stocks\nWhile ETFs and [stocks](https:\/\/www.bankrate.com\/investing\/how-to-invest-in-stocks\/) both trade throughout the day, there are some key differences between the two types of securities.\n\nA stock represents an ownership interest in a single company while an ETF holds a number of different stocks or other assets. A stock ETF may hold stock in hundreds of different companies, allowing its investors to hold a diversified portfolio by owning just one security: the ETF.\n\nThat diversification reduces the risk for investors, compared to holding a single stock or just a few individual stocks. An ETF is generally less volatile than an individual stock, as well.\n\n##\n## Are ETFs good for beginners?\nETFs are popular because they offer investors [a lot of valuable traits](https:\/\/www.bankrate.com\/investing\/how-to-invest-in-etfs\/). And that’s especially [good for beginning investors](https:\/\/www.bankrate.com\/investing\/best-investments-for-beginners\/).\n\n- **Low minimum investment:** The minimums for ETFs are usually the cost of just one share, which can vary from very little to perhaps a couple hundred dollars. Compare that with the minimum initial investment for a mutual fund, which might run into the thousands. And some brokers will even allow you [to buy fractions of shares](https:\/\/www.bankrate.com\/investing\/best-online-brokers-for-beginners\/), so you don’t even need enough for a full share to get started.\n- **Usually commission-free:** On top of that, many brokers allow you to trade ETFs without a commission. [Charles Schwab](https:\/\/www.bankrate.com\/investing\/brokerage-reviews\/charles-schwab\/) and Fidelity are notable examples, but [Robinhood](https:\/\/www.bankrate.com\/investing\/brokerage-reviews\/robinhood\/) also offers all the ETFs on its platform without a trading fee. So you can get in the game at a very low cost.\n- **Thematic:** ETFs also allow investors to [buy into a specific investing theme](https:\/\/www.bankrate.com\/investing\/top-etf-categories-to-watch\/) easily, even if they don’t know much about it. If you’re not a biotech expert, a focused biotech ETF will give you exposure to the industry, so you don’t have to pick and choose which companies are the winners.\n- **Diversification:** ETFs also offer instant diversification. You can buy one fund and own a specific set of companies that are focused on one area of the market, or even own the whole market. In either case, you get diversification and [the risk reduction that comes with it](https:\/\/www.bankrate.com\/investing\/diversification-is-important-in-investing\/).\n- **Own the market:** Finally, ETFs also allow you to buy popular indexes such as the S\\&P 500, letting you “own the market” and get the market return, which has averaged about 10 percent annually over time. It’s incredibly easy for investors to buy such an ETF and enjoy the market average with little investing work.\n\nHere are [some top ETFs](https:\/\/www.bankrate.com\/investing\/best-etfs\/) to consider this year.\n\n##\n## Are ETFs a good investment?\nHow an ETF performs depends entirely on the stocks, bonds and other assets that it’s invested in. If the fund’s investments rise, then the ETF will rise as well. If its investments fall in value, the ETF’s price will fall, too. In short, the performance of the ETF is just a weighted average of all its holdings. So not all ETFs are created equal, and it’s important to know what your ETF is invested in.\n\nBut the structure of an ETF is a good setup for investors, largely due to their low costs.\n\nETFs tend to have low expense ratios — the cheapest funds cost just a few dollars annually for each \\$10,000 invested. In large part, that’s because they’re passive investments, meaning that they use preset indexes to determine what they own, rather than paying high-priced investment managers to actively scour the market for the best holdings. The goal of a passive ETF is to track the performance of the index that it follows, not beat it.\n\nIn addition, ETFs also give you all the benefits listed above: low investment minimums, diversification, a focused or thematic investment and a wide choice of funds.\n\n## Bottom line\nETFs have proven incredibly popular in the last few decades, and that popularity is set to continue. One of the most popular investing strategies — buying and holding an S\\&P 500 index fund — has been [recommended by legendary investor Warren Buffett](https:\/\/www.bankrate.com\/investing\/good-investment-advice-to-follow\/). While the influx of cash to ETFs might hiccup when the market fluctuates, the long-term trend toward ETF investing looks clear.\n\n*Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.*\n\nDid you find this page helpful?\n\n**Why we ask for feedback** Your feedback helps us improve our content and services. It takes less than a minute to complete.\n\nYour responses are anonymous and will only be used for improving our website.\n\nHelp us improve our content\n\nYes\n\nNo\n\nThank you for your feedback\\!\n\nYour input helps us improve our content and services.\n\nCite us\n\nShare this article\n\nShare this article\n\nClose\n\n![](https:\/\/www.bankrate.com\/2021\/10\/26151853\/James-Royal-headshot-scaled-square.jpg?auto=webp&quality=85&width=96&height=96&fit=cover&enable=upscale&crop=1:1,smart)\n\nWritten by\n\n[James Royal, Ph.D.](https:\/\/www.bankrate.com\/authors\/james-royal\/)\n\nFormer Principal Writer, Investing and Wealth Management\n\n- [Connect with James Royal, Ph.D. on Twitter](https:\/\/twitter.com\/JimRoyalPhD)\n- [Connect with James Royal, Ph.D. on LinkedIn](https:\/\/www.linkedin.com\/in\/james-royal-phd-809b929\/)\n- [Get in contact with James Royal, Ph.D. via Email](mailto:jroyal@redventures.com)\n\n[Read more from James](https:\/\/www.bankrate.com\/authors\/james-royal\/)\n\nFormer Bankrate principal writer and editor James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more.\n\n![Person being lifted into the air by balloons. Across each balloon is a letter, spelling out ETF?](https:\/\/www.bankrate.com\/brp\/2024\/03\/17182855\/Investments_What-is-an-ETF_-Learn-about-exchange-traded-funds.jpg?auto=webp&optimize=high&crop=16:9)\n\nImages by Getty Images; Illustration by Issiah Davis\/Bankrate\n\nBankrate is always editorially independent. While we adhere to strict editorial integrity , this post may contain references to products from our partners. Here's an explanation for how we make money . Our Bankrate promise is to ensure everything we publish is objective, accurate and trustworthy.\n\nTable of contents\n\n- [What is an ETF and how does it work?](https:\/\/www.bankrate.com\/investing\/what-are-etfs\/#what-is)\n- [Types of ETFs](https:\/\/www.bankrate.com\/investing\/what-are-etfs\/#types)\n- [Pros and cons of ETFs](https:\/\/www.bankrate.com\/investing\/what-are-etfs\/#pros-cons)\n- [ETFs vs. mutual funds](https:\/\/www.bankrate.com\/investing\/what-are-etfs\/#v-mutual)\n- [ETFs vs. stocks](https:\/\/www.bankrate.com\/investing\/what-are-etfs\/#v-stocks)\n- [Are ETFs good for beginners?](https:\/\/www.bankrate.com\/investing\/what-are-etfs\/#beginners)\n- [Are ETFs a good investment?](https:\/\/www.bankrate.com\/investing\/what-are-etfs\/#good)\n\nBack to top\n\n## Up next\nPart of   Basics of ETF Investing\n\n![Wood blocks that say ETF are stacked among coins on a blue background.](https:\/\/www.bankrate.com\/brp\/2025\/05\/15114612\/How_to_Invest_in_ETFs-300x169.jpg)\n\n[How to invest in ETFs: A 3-step guide for beginners](https:\/\/www.bankrate.com\/investing\/how-to-invest-in-etfs\/?series=basics-of-etf-investing)\n\nInvesting\n\nBy [James Royal, Ph.D.](https:\/\/www.bankrate.com\/authors\/james-royal\/)\n\n7 min read\n\n![A man and a woman choose which ice cream they want](https:\/\/www.bankrate.com\/2022\/04\/15101138\/Stocks-vs-ETFs.jpeg)\n\n[Stocks vs. ETFs: Which should you invest in?](https:\/\/www.bankrate.com\/investing\/stocks-vs-etfs\/?series=basics-of-etf-investing)\n\nInvesting\n\nBy [James Royal, Ph.D.](https:\/\/www.bankrate.com\/authors\/james-royal\/)\n\n7 min read\n\n![A young couple look at their laptop computer in a cottage](https:\/\/www.bankrate.com\/2021\/07\/06175630\/Best-ETFs.jpeg)\n\n[Best ETFs for May 2023](https:\/\/www.bankrate.com\/investing\/best-etfs\/?series=basics-of-etf-investing)\n\nInvesting\n\nBy [James Royal, Ph.D.](https:\/\/www.bankrate.com\/authors\/james-royal\/)\n\n17 min read\n\n## [Bankrate logo](https:\/\/www.bankrate.com\/)\n### About\n- [About us](https:\/\/www.bankrate.com\/about\/)\n- [Leadership](https:\/\/www.bankrate.com\/leadership\/)\n- [Press room](https:\/\/www.bankrate.com\/press-releases\/)\n- [Bankrate Data Center](https:\/\/www.bankrate.com\/data-center\/)\n- [Careers](https:\/\/www.bankrate.com\/careers\/)\n- [Site map](https:\/\/www.bankrate.com\/corporate\/site-map\/)\n\n### Help\n- [Compare rates](https:\/\/www.bankrate.com\/compare-rates\/)\n- [Latest news](https:\/\/www.bankrate.com\/news\/)\n- [Popular topics](https:\/\/www.bankrate.com\/popular-finance-topics\/)\n- [Advertise with us](https:\/\/www.bankrate.com\/media-kit\/)\n\n### Legal\n- [Privacy policy](https:\/\/www.bankrate.com\/privacy\/)\n- Cookie settings\n- [Do Not Sell or Share My Personal Information](https:\/\/www.bankrate.com\/do-not-sell-or-share-my-personal-information\/)\n- [Consumer Health Information Privacy Policy](https:\/\/www.bankrate.com\/consumer-health-information-privacy-policy\/)\n- [Understanding Bankrate’s averages](https:\/\/www.bankrate.com\/understanding-bankrates-rate-averages\/)\n- [Terms of use](https:\/\/www.bankrate.com\/terms\/)\n- [GLBA annual notice](https:\/\/www.bankrate.com\/glba-notice\/)\n- [California Consumer Financial Privacy Notice](https:\/\/www.bankrate.com\/2022\/02\/15094901\/california-notice.pdf)\n- [Licenses](https:\/\/www.bankrate.com\/licenses\/)\n\n### How we make money\nBankrate.com is an independent, advertising-supported publisher and comparison service. 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The information, including any rates, terms and fees associated with financial products, presented in the review is accurate as of the date of publication.\n\n## The Bankrate promise\nFounded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.\n\nBankrate follows a strict [editorial policy](https:\/\/www.bankrate.com\/editorial-guidelines\/ \"editorial policy\"), so you can trust that we’re putting your interests first. All of our content is authored by [highly qualified professionals](https:\/\/www.bankrate.com\/authors\/ \"highly qualified professionals\") and edited by [subject matter experts](https:\/\/www.bankrate.com\/financial-review-board\/ \"subject matter experts\"), who ensure everything we publish is objective, accurate and trustworthy.\n\nOur investing reporters and editors focus on the points consumers care about most — how to get started, the best brokers, types of investment accounts, how to choose investments and more — so you can feel confident when investing your money.\n\n**Investing disclosure:**\n\nThe investment information provided in this table is for informational and general educational purposes only and should not be construed as investment or financial advice. Bankrate does not offer advisory or brokerage services, nor does it provide individualized recommendations or personalized investment advice. Investment decisions should be based on an evaluation of your own personal financial situation, needs, risk tolerance and investment objectives. Investing involves risk including the potential loss of principal.\n\n## Editorial integrity\nBankrate follows a strict [editorial policy](https:\/\/www.bankrate.com\/editorial-guidelines\/ \"editorial policy\"), so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.\n\n### Key Principles\nWe value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers.\n\n### Editorial Independence\nBankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information.\n\n## How we make money\nYou have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey.\n\nBankrate follows a strict [editorial policy](https:\/\/www.bankrate.com\/editorial-guidelines\/ \"editorial policy\"), so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers.\n\nWe’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money.\n\nBankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories, except where prohibited by law for our mortgage, home equity and other home lending products. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range, can also impact how and where products appear on this site. While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service.\n\nTable of contents\n\n- [What is an ETF and how does it work?](https:\/\/www.bankrate.com\/investing\/what-are-etfs\/#what-is)\n- [Types of ETFs](https:\/\/www.bankrate.com\/investing\/what-are-etfs\/#types)\n- [Pros and cons of ETFs](https:\/\/www.bankrate.com\/investing\/what-are-etfs\/#pros-cons)\n- [ETFs vs. mutual funds](https:\/\/www.bankrate.com\/investing\/what-are-etfs\/#v-mutual)\n- [ETFs vs. stocks](https:\/\/www.bankrate.com\/investing\/what-are-etfs\/#v-stocks)\n- [Are ETFs good for beginners?](https:\/\/www.bankrate.com\/investing\/what-are-etfs\/#beginners)\n- [Are ETFs a good investment?](https:\/\/www.bankrate.com\/investing\/what-are-etfs\/#good)\n\n**Quick citation guide**   Select a citation to automatically copy to clipboard.\n\n**APA:**  Royal, J. (2025, April 18). *What is an ETF? Learn about exchange-traded funds.* Bankrate. Retrieved April 09, 2026, from https:\/\/www.bankrate.com\/investing\/what-are-etfs\/\n\nCopied to clipboard\\!\n\n**MLA:**  Royal, James. \"What is an ETF? Learn about exchange-traded funds.\" *Bankrate*. 18 April 2025, https:\/\/www.bankrate.com\/investing\/what-are-etfs\/.\n\nCopied to clipboard\\!\n\n**Chicago:**  Royal, James. \"What is an ETF? Learn about exchange-traded funds.\" Bankrate. April 18, 2025. https:\/\/www.bankrate.com\/investing\/what-are-etfs\/.\n\nCopied to clipboard\\!\n\n![](https:\/\/www.facebook.com\/tr?id=1805085980359671&ev=PageView&noscript=1)\n\n![](https:\/\/www.facebook.com\/tr?id=1564326531369118&ev=PageView&noscript=1)","attrs_readable_markdown":"Exchange-traded funds, or ETFs, are one of the hottest investing trends of the last two decades. ETFs held about \\$11 trillion in assets at year-end 2023, according to research conducted by TrackInsight in collaboration with J.P. Morgan, reaching historic highs for the fast-growing asset class. ETFs allow investors to buy a collection of assets in just one fund, and they trade on an exchange like a stock. They’re popular because they meet the needs of investors, and usually for low cost.\n\nHere’s what you need to know about ETFs and why so many investors are drawn to them.\n\n## What is an ETF and how does it work?\nETFs are a type of fund that owns various kinds of securities, often of one type. For example, a stock ETF holds stocks, while a bond ETF holds bonds. One share of the ETF gives buyers ownership of all the stocks or bonds in the fund. For example, if an ETF held 100 stocks, then those who owned the fund would own a stake — a very tiny one — in each of those 100 stocks.\n\n[ETFs are typically passively managed](https:\/\/www.bankrate.com\/investing\/active-versus-passive\/), meaning that the fund usually holds a fixed number of securities based on a specific preset index of investments. In contrast, many mutual funds are actively managed, with professional investors trying to select the investments that will rise and fall.\n\nFor example, the [Standard & Poor’s 500 index](https:\/\/www.bankrate.com\/investing\/what-is-sp-500\/) is perhaps the world’s best-known index, and it forms the basis of many ETFs. Other popular indexes include the Dow Jones Industrial Average and the [Nasdaq Composite index](https:\/\/www.bankrate.com\/investing\/what-is-nasdaq-composite\/#:~:text=The%20Nasdaq%20Composite%20is%20an,number%20of%20technology-related%20companies.). ETFs based on these funds — they’re called index funds — just buy and hold whatever is in the index and make no active trading decisions.\n\nETFs trade on a stock exchange during the day, unlike mutual funds that trade only after the market closes. With an ETF, you can place a trade whenever the market is open and know exactly the price you’re paying for the fund.\n\nFor these benefits, ETFs charge an [expense ratio](https:\/\/www.bankrate.com\/investing\/what-is-an-expense-ratio\/), which is the fee paid by investors for managing the fund. The advent of ETFs has caused the expense ratios of both mutual funds and ETFs to fall drastically over time, as cheap passively managed ETFs became popular.\n\n## What are the major types of ETFs?\nETFs come in a variety of flavors that cater to the needs of investors. ETFs chop up the market into industries, investment themes, valuation and other characteristics that investors care about.\n\nHere are some of the most popular ETF categories and what they include.\n\nValue stocks\n\nStocks that look cheap relative to their earnings or assets. [Value ETFs](https:\/\/www.bankrate.com\/investing\/best-value-etfs\/) are the funds that hold these stocks.\n\nIndustry\n\nSecurities from companies in a specific industry, such as consumer goods.\n\nMajor indexes\n\nStocks based on a major index such as the S\\&P 500 or the Nasdaq 100.\n\nCountry\n\nStocks with substantial exposure to a given country.\n\nCompany size\n\nOwn companies of a given size, typically either small, medium or large.\n\nBonds\n\nBonds sliced by any number of characteristics, including safety, duration and issuer.\n\nCommodity\n\nInvestments in physical commodities ([gold, for example](https:\/\/www.bankrate.com\/investing\/best-gold-etfs\/)) or producers of it.\n\nInverse\n\n[Inverse ETFs](https:\/\/www.bankrate.com\/investing\/best-inverse-etfs\/) go up when the price of the holdings go down, allowing investors to profit on the decline of securities.\n\nFund managers can dissect the market into almost any number of characteristics if they think investors will be interested in buying the end product.\n\n## Pros and cons of ETFs\nETFs offer a number of important advantages to investors, especially in terms of investment choice, ease, and expense. But ETFs are also valuable because they allow investors to “slice and dice” the investing universe and gain exposure to specific investing “themes.”\n\n### Pros\n- **Investment choice:** ETFs give investors new investment choices, because they create new securities as funds. With an ETF, you can [invest in an S\\&P 500 index fund](https:\/\/www.bankrate.com\/investing\/how-to-buy-sp-500-index-fund\/) right on the exchange, rather than having to buy a small piece of each stock.\n- **Diversification:** ETFs allow investors to easily achieve objectives [such as diversification](https:\/\/www.bankrate.com\/investing\/diversification-is-important-in-investing\/). One fund can provide instant diversification, either across an industry or across the entire market. Investors can easily buy multiple funds that target each sector they’d like to own.\n- **Low cost:** ETFs can be relatively cheap as well, and they’ve only gotten cheaper over time. The asset-weighted average expense ratio of a stock index ETF was 0.14 percent in 2024, according to the Investment Company Institute, and the number has been falling for the last decade. It was even cheaper for bond index ETFs, with an expense ratio of just 0.10 percent. The [best index funds](https:\/\/www.bankrate.com\/investing\/best-index-funds\/), such as those based on the S\\&P 500, go for much cheaper than that even. The Vanguard S\\&P 500 ETF (VOO), for example, costs 0.03 percent.\n- **Focused investments:** ETFs are also popular because they allow investors to create exposure to specific sectors or investing themes. For example, ETFs can focus on high-yield stocks or value-priced stocks. They can target biotech stocks or [companies with exposure to Brazil or India](https:\/\/www.bankrate.com\/investing\/how-to-invest-in-etfs\/), for example.\n- **More tax-efficient:** ETFs are structured so that they make only minimal distributions of capital gains, keeping tax liabilities lower for investors.\n### Cons of ETFs\n- **Can be overvalued:** ETFs can trade at a higher [net asset value](https:\/\/www.bankrate.com\/investing\/what-is-net-asset-value\/) than their individual holdings. That is, investors may be able to pay more for the ETF than it actually owns. That said, this situation doesn’t happen often and the spread is rarely wide, but it can happen. In contrast, mutual funds always trade at their net asset value.\n- **Not as focused as advertised:** ETFs do not always offer the level of targeted exposure that they claim to. For example, some ETFs provide exposure to certain countries, and they’ll own companies based in that area. The issue is that often the large companies that comprise much of the fund earn a large portion of their sales from outside the targeted area. For instance, imagine an ETF that gives focused exposure to England, and to do so it owns, among many other companies, a stake in a British-based company such as Diageo, a maker of spirits. But Diageo also earns a huge percentage of its sales from outside the country. So an ETF can be much less focused on a specific niche than you would believe, given the fund’s name and purported target. So you often have to look into a fund’s holdings to understand what you actually own.\n## ETFs vs. mutual funds\nWhile mutual funds and ETFs have similar goals to own a wide variety of assets in one security, [they have many key differences](https:\/\/www.bankrate.com\/investing\/mutual-fund-vs-etf-which-is-better\/), and those differences have helped ETFs thrive, especially in the last decade. Here are some of the main areas where these two kinds of funds differ.\n\n| Category | Mutual fund | ETF |\n|---|---|---|\n| **Average annual expense (2024)\\*** | 0\\.64 percent for actively managed stock funds; 0.47 for active bond funds; stock and bond index funds average 0.05 percent | 0\\.14 percent asset-weighted average for stock funds; 0.10 percent for bond funds |\n| **Commission** | May run as high as \\$50 at major brokers, though many brokers offer free trades on select funds | Free at major online brokers |\n| **Initial minimum** | Often a few thousand dollars unless purchased as part of a [401(k)](https:\/\/www.bankrate.com\/retirement\/401k\/) or other retirement plan | Usually just the cost of a single share, sometimes just \\$10 or \\$20, depending on the fund |\n| **Management style** | Active and passive | Mainly passive |\n| **When does it trade?** | After the market closes | When the exchange is open |\n| **Investment strategies** | All kinds, value stocks, dividend stocks, bonds, indexes, etc. | All kinds, value stocks, dividend stocks, bonds, indexes, etc. |\n|   |   | *\\*According to the Investment Company Institute* |\n\nThe passive strategy used primarily by ETFs keeps management fees low, and this low cost is passed on to consumers in the form of low expense ratios. Over time, that’s put pressure on the expense ratios of mutual funds to come down in order to compete.\n\n## ETFs vs. stocks\nWhile ETFs and [stocks](https:\/\/www.bankrate.com\/investing\/how-to-invest-in-stocks\/) both trade throughout the day, there are some key differences between the two types of securities.\n\nA stock represents an ownership interest in a single company while an ETF holds a number of different stocks or other assets. A stock ETF may hold stock in hundreds of different companies, allowing its investors to hold a diversified portfolio by owning just one security: the ETF.\n\nThat diversification reduces the risk for investors, compared to holding a single stock or just a few individual stocks. An ETF is generally less volatile than an individual stock, as well.\n\n## Are ETFs good for beginners?\nETFs are popular because they offer investors [a lot of valuable traits](https:\/\/www.bankrate.com\/investing\/how-to-invest-in-etfs\/). And that’s especially [good for beginning investors](https:\/\/www.bankrate.com\/investing\/best-investments-for-beginners\/).\n\n- **Low minimum investment:** The minimums for ETFs are usually the cost of just one share, which can vary from very little to perhaps a couple hundred dollars. Compare that with the minimum initial investment for a mutual fund, which might run into the thousands. And some brokers will even allow you [to buy fractions of shares](https:\/\/www.bankrate.com\/investing\/best-online-brokers-for-beginners\/), so you don’t even need enough for a full share to get started.\n- **Usually commission-free:** On top of that, many brokers allow you to trade ETFs without a commission. [Charles Schwab](https:\/\/www.bankrate.com\/investing\/brokerage-reviews\/charles-schwab\/) and Fidelity are notable examples, but [Robinhood](https:\/\/www.bankrate.com\/investing\/brokerage-reviews\/robinhood\/) also offers all the ETFs on its platform without a trading fee. So you can get in the game at a very low cost.\n- **Thematic:** ETFs also allow investors to [buy into a specific investing theme](https:\/\/www.bankrate.com\/investing\/top-etf-categories-to-watch\/) easily, even if they don’t know much about it. If you’re not a biotech expert, a focused biotech ETF will give you exposure to the industry, so you don’t have to pick and choose which companies are the winners.\n- **Diversification:** ETFs also offer instant diversification. You can buy one fund and own a specific set of companies that are focused on one area of the market, or even own the whole market. In either case, you get diversification and [the risk reduction that comes with it](https:\/\/www.bankrate.com\/investing\/diversification-is-important-in-investing\/).\n- **Own the market:** Finally, ETFs also allow you to buy popular indexes such as the S\\&P 500, letting you “own the market” and get the market return, which has averaged about 10 percent annually over time. It’s incredibly easy for investors to buy such an ETF and enjoy the market average with little investing work.\n\nHere are [some top ETFs](https:\/\/www.bankrate.com\/investing\/best-etfs\/) to consider this year.\n\n## Are ETFs a good investment?\nHow an ETF performs depends entirely on the stocks, bonds and other assets that it’s invested in. If the fund’s investments rise, then the ETF will rise as well. If its investments fall in value, the ETF’s price will fall, too. In short, the performance of the ETF is just a weighted average of all its holdings. So not all ETFs are created equal, and it’s important to know what your ETF is invested in.\n\nBut the structure of an ETF is a good setup for investors, largely due to their low costs.\n\nETFs tend to have low expense ratios — the cheapest funds cost just a few dollars annually for each \\$10,000 invested. In large part, that’s because they’re passive investments, meaning that they use preset indexes to determine what they own, rather than paying high-priced investment managers to actively scour the market for the best holdings. The goal of a passive ETF is to track the performance of the index that it follows, not beat it.\n\nIn addition, ETFs also give you all the benefits listed above: low investment minimums, diversification, a focused or thematic investment and a wide choice of funds.\n\n## Bottom line\nETFs have proven incredibly popular in the last few decades, and that popularity is set to continue. One of the most popular investing strategies — buying and holding an S\\&P 500 index fund — has been [recommended by legendary investor Warren Buffett](https:\/\/www.bankrate.com\/investing\/good-investment-advice-to-follow\/). While the influx of cash to ETFs might hiccup when the market fluctuates, the long-term trend toward ETF investing looks clear.\n\n*Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.*\n\nDid you find this page helpful?\n\nHelp us improve our content","meta_canonical":null}

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Boilerpipe Text	Exchange-traded funds, or ETFs, are one of the hottest investing trends of the last two decades. ETFs held about $11 trillion in assets at year-end 2023, according to research conducted by TrackInsight in collaboration with J.P. Morgan, reaching historic highs for the fast-growing asset class. ETFs allow investors to buy a collection of assets in just one fund, and they trade on an exchange like a stock. They’re popular because they meet the needs of investors, and usually for low cost. Here’s what you need to know about ETFs and why so many investors are drawn to them. What is an ETF and how does it work? ETFs are a type of fund that owns various kinds of securities, often of one type. For example, a stock ETF holds stocks, while a bond ETF holds bonds. One share of the ETF gives buyers ownership of all the stocks or bonds in the fund. For example, if an ETF held 100 stocks, then those who owned the fund would own a stake — a very tiny one — in each of those 100 stocks. ETFs are typically passively managed , meaning that the fund usually holds a fixed number of securities based on a specific preset index of investments. In contrast, many mutual funds are actively managed, with professional investors trying to select the investments that will rise and fall. For example, the Standard & Poor’s 500 index is perhaps the world’s best-known index, and it forms the basis of many ETFs. Other popular indexes include the Dow Jones Industrial Average and the Nasdaq Composite index . ETFs based on these funds — they’re called index funds — just buy and hold whatever is in the index and make no active trading decisions. ETFs trade on a stock exchange during the day, unlike mutual funds that trade only after the market closes. With an ETF, you can place a trade whenever the market is open and know exactly the price you’re paying for the fund. For these benefits, ETFs charge an expense ratio , which is the fee paid by investors for managing the fund. The advent of ETFs has caused the expense ratios of both mutual funds and ETFs to fall drastically over time, as cheap passively managed ETFs became popular. What are the major types of ETFs? ETFs come in a variety of flavors that cater to the needs of investors. ETFs chop up the market into industries, investment themes, valuation and other characteristics that investors care about. Here are some of the most popular ETF categories and what they include. Value stocks Stocks that look cheap relative to their earnings or assets. Value ETFs are the funds that hold these stocks. Industry Securities from companies in a specific industry, such as consumer goods. Major indexes Stocks based on a major index such as the S&P 500 or the Nasdaq 100. Country Stocks with substantial exposure to a given country. Company size Own companies of a given size, typically either small, medium or large. Bonds Bonds sliced by any number of characteristics, including safety, duration and issuer. Commodity Investments in physical commodities ( gold, for example ) or producers of it. Inverse Inverse ETFs go up when the price of the holdings go down, allowing investors to profit on the decline of securities. Fund managers can dissect the market into almost any number of characteristics if they think investors will be interested in buying the end product. Pros and cons of ETFs ETFs offer a number of important advantages to investors, especially in terms of investment choice, ease, and expense. But ETFs are also valuable because they allow investors to “slice and dice” the investing universe and gain exposure to specific investing “themes.” Pros Investment choice: ETFs give investors new investment choices, because they create new securities as funds. With an ETF, you can invest in an S&P 500 index fund right on the exchange, rather than having to buy a small piece of each stock. Diversification: ETFs allow investors to easily achieve objectives such as diversification . One fund can provide instant diversification, either across an industry or across the entire market. Investors can easily buy multiple funds that target each sector they’d like to own. Low cost: ETFs can be relatively cheap as well, and they’ve only gotten cheaper over time. The asset-weighted average expense ratio of a stock index ETF was 0.14 percent in 2024, according to the Investment Company Institute, and the number has been falling for the last decade. It was even cheaper for bond index ETFs, with an expense ratio of just 0.10 percent. The best index funds , such as those based on the S&P 500, go for much cheaper than that even. The Vanguard S&P 500 ETF (VOO), for example, costs 0.03 percent. Focused investments: ETFs are also popular because they allow investors to create exposure to specific sectors or investing themes. For example, ETFs can focus on high-yield stocks or value-priced stocks. They can target biotech stocks or companies with exposure to Brazil or India , for example. More tax-efficient: ETFs are structured so that they make only minimal distributions of capital gains, keeping tax liabilities lower for investors. Cons of ETFs Can be overvalued: ETFs can trade at a higher net asset value than their individual holdings. That is, investors may be able to pay more for the ETF than it actually owns. That said, this situation doesn’t happen often and the spread is rarely wide, but it can happen. In contrast, mutual funds always trade at their net asset value. Not as focused as advertised: ETFs do not always offer the level of targeted exposure that they claim to. For example, some ETFs provide exposure to certain countries, and they’ll own companies based in that area. The issue is that often the large companies that comprise much of the fund earn a large portion of their sales from outside the targeted area. For instance, imagine an ETF that gives focused exposure to England, and to do so it owns, among many other companies, a stake in a British-based company such as Diageo, a maker of spirits. But Diageo also earns a huge percentage of its sales from outside the country. So an ETF can be much less focused on a specific niche than you would believe, given the fund’s name and purported target. So you often have to look into a fund’s holdings to understand what you actually own. ETFs vs. mutual funds While mutual funds and ETFs have similar goals to own a wide variety of assets in one security, they have many key differences , and those differences have helped ETFs thrive, especially in the last decade. Here are some of the main areas where these two kinds of funds differ. Category Mutual fund ETF Average annual expense (2024)* 0.64 percent for actively managed stock funds; 0.47 for active bond funds; stock and bond index funds average 0.05 percent 0.14 percent asset-weighted average for stock funds; 0.10 percent for bond funds Commission May run as high as $50 at major brokers, though many brokers offer free trades on select funds Free at major online brokers Initial minimum Often a few thousand dollars unless purchased as part of a 401(k) or other retirement plan Usually just the cost of a single share, sometimes just $10 or $20, depending on the fund Management style Active and passive Mainly passive When does it trade? After the market closes When the exchange is open Investment strategies All kinds, value stocks, dividend stocks, bonds, indexes, etc. All kinds, value stocks, dividend stocks, bonds, indexes, etc. *According to the Investment Company Institute The passive strategy used primarily by ETFs keeps management fees low, and this low cost is passed on to consumers in the form of low expense ratios. Over time, that’s put pressure on the expense ratios of mutual funds to come down in order to compete. ETFs vs. stocks While ETFs and stocks both trade throughout the day, there are some key differences between the two types of securities. A stock represents an ownership interest in a single company while an ETF holds a number of different stocks or other assets. A stock ETF may hold stock in hundreds of different companies, allowing its investors to hold a diversified portfolio by owning just one security: the ETF. That diversification reduces the risk for investors, compared to holding a single stock or just a few individual stocks. An ETF is generally less volatile than an individual stock, as well. Are ETFs good for beginners? ETFs are popular because they offer investors a lot of valuable traits . And that’s especially good for beginning investors . Low minimum investment: The minimums for ETFs are usually the cost of just one share, which can vary from very little to perhaps a couple hundred dollars. Compare that with the minimum initial investment for a mutual fund, which might run into the thousands. And some brokers will even allow you to buy fractions of shares , so you don’t even need enough for a full share to get started. Usually commission-free: On top of that, many brokers allow you to trade ETFs without a commission. Charles Schwab and Fidelity are notable examples, but Robinhood also offers all the ETFs on its platform without a trading fee. So you can get in the game at a very low cost. Thematic: ETFs also allow investors to buy into a specific investing theme easily, even if they don’t know much about it. If you’re not a biotech expert, a focused biotech ETF will give you exposure to the industry, so you don’t have to pick and choose which companies are the winners. Diversification: ETFs also offer instant diversification. You can buy one fund and own a specific set of companies that are focused on one area of the market, or even own the whole market. In either case, you get diversification and the risk reduction that comes with it . Own the market: Finally, ETFs also allow you to buy popular indexes such as the S&P 500, letting you “own the market” and get the market return, which has averaged about 10 percent annually over time. It’s incredibly easy for investors to buy such an ETF and enjoy the market average with little investing work. Here are some top ETFs to consider this year. Are ETFs a good investment? How an ETF performs depends entirely on the stocks, bonds and other assets that it’s invested in. If the fund’s investments rise, then the ETF will rise as well. If its investments fall in value, the ETF’s price will fall, too. In short, the performance of the ETF is just a weighted average of all its holdings. So not all ETFs are created equal, and it’s important to know what your ETF is invested in. But the structure of an ETF is a good setup for investors, largely due to their low costs. ETFs tend to have low expense ratios — the cheapest funds cost just a few dollars annually for each $10,000 invested. In large part, that’s because they’re passive investments, meaning that they use preset indexes to determine what they own, rather than paying high-priced investment managers to actively scour the market for the best holdings. The goal of a passive ETF is to track the performance of the index that it follows, not beat it. In addition, ETFs also give you all the benefits listed above: low investment minimums, diversification, a focused or thematic investment and a wide choice of funds. Bottom line ETFs have proven incredibly popular in the last few decades, and that popularity is set to continue. One of the most popular investing strategies — buying and holding an S&P 500 index fund — has been recommended by legendary investor Warren Buffett . While the influx of cash to ETFs might hiccup when the market fluctuates, the long-term trend toward ETF investing looks clear. Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation. Did you find this page helpful? Info Icon Help us improve our content
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[Investing](https://www.bankrate.com/investing/) › 2. What is an ETF? Learn about exchange-traded funds Advertiser Disclosure # What is an ETF? Learn about exchange-traded funds ![James Royal, Ph.D.](https://www.bankrate.com/2021/10/26151853/James-Royal-headshot-scaled-square.jpg?auto=webp&quality=85&width=24&height=24&fit=cover&enable=upscale&crop=1:1,smart) ![Brian Beers](https://www.bankrate.com/2019/05/06102103/b-beers-headshot1.jpg?auto=webp&quality=85&width=24&height=24&fit=cover&enable=upscale&crop=1:1,smart) ![Kenneth Chavis IV](https://www.bankrate.com/brp/2025/01/24125453/VCM-Headshot.jpg?auto=webp&quality=85&width=24&height=24&fit=cover&enable=upscale&crop=1:1,smart) Written by James Royal, Ph.D. , ![](https://www.bankrate.com/2021/10/26151853/James-Royal-headshot-scaled-square.jpg?auto=webp&quality=85&width=64&height=64&fit=cover&enable=upscale&crop=1:1,smart) [James Royal, Ph.D.](https://www.bankrate.com/authors/james-royal/) Former Principal Writer, Investing and Wealth Management Expertise - • Investing - • Wealth management Former Bankrate principal writer and editor James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more. [Read more](https://www.bankrate.com/authors/james-royal/) - [Connect with James Royal, Ph.D. on Twitter](https://twitter.com/JimRoyalPhD) - [Connect with James Royal, Ph.D. on LinkedIn](https://www.linkedin.com/in/james-royal-phd-809b929/) - [Get in contact with James Royal, Ph.D. via Email](mailto:jroyal@redventures.com) Close [James Royal, Ph.D.](https://www.bankrate.com/authors/james-royal/), Edited by Brian Beers , ![](https://www.bankrate.com/2019/05/06102103/b-beers-headshot1.jpg?auto=webp&quality=85&width=64&height=64&fit=cover&enable=upscale&crop=1:1,smart) [Brian Beers](https://www.bankrate.com/authors/brian-beers/) Former Managing Editor Expertise - • Investing - • Banking Brian Beers is a former managing editor for Bankrate. He oversaw editorial coverage of banking, investing, the economy and all things money. [Read more](https://www.bankrate.com/authors/brian-beers/) - [Connect with Brian Beers on Twitter](https://twitter.com/brian_beers) - [Connect with Brian Beers on LinkedIn](https://www.linkedin.com/in/brian-beers/) Close [Brian Beers](https://www.bankrate.com/authors/brian-beers/), Reviewed by Kenneth Chavis IV , ![](https://www.bankrate.com/brp/2025/01/24125453/VCM-Headshot.jpg?auto=webp&quality=85&width=64&height=64&fit=cover&enable=upscale&crop=1:1,smart) [Kenneth Chavis IV](https://www.bankrate.com/authors/kenneth-chavis-iv/) Senior wealth advisor at Versant Capital Management Expertise - • Investing and retirement - • Mortgages and real estate Kenneth Chavis IV is a senior wealth counselor at Versant Capital Management who provides investment management, complex wealth strategy, financial planning and tax advice to business owners, executives, medical doctors, and more. [Read more](https://www.bankrate.com/authors/kenneth-chavis-iv/) [About our review board](https://www.bankrate.com/financial-review-board/) Close [Kenneth Chavis IV](https://www.bankrate.com/authors/kenneth-chavis-iv/), Expert verified How is this page expert verified? At Bankrate, we take the accuracy of our content seriously. “Expert verified” means that our Financial Review Board thoroughly evaluated the article for accuracy and clarity. The Review Board comprises a panel of financial experts whose objective is to ensure that our content is always objective and balanced. Their reviews hold us accountable for publishing high-quality and trustworthy content. [About our Review Board](https://www.bankrate.com/financial-review-board/) Close [Expert verified](https://www.bankrate.com/financial-review-board/) Published on April 18, 2025 \\| 7 min read Bankrate is always editorially independent. While we adhere to strict editorial integrity , this post may contain references to products from our partners. Here's an explanation for how we make money . Our Bankrate promise is to ensure everything we publish is objective, accurate and trustworthy. ![Person being lifted into the air by balloons. Across each balloon is a letter, spelling out ETF?](https://www.bankrate.com/brp/2024/03/17182855/Investments_What-is-an-ETF_-Learn-about-exchange-traded-funds.jpg?auto=webp&optimize=high&crop=16:9) Images by Getty Images; Illustration by Issiah Davis/Bankrate Table of contents - [What is an ETF and how does it work?](https://www.bankrate.com/investing/what-are-etfs/#what-is) - [Types of ETFs](https://www.bankrate.com/investing/what-are-etfs/#types) - [Pros and cons of ETFs](https://www.bankrate.com/investing/what-are-etfs/#pros-cons) - [ETFs vs. mutual funds](https://www.bankrate.com/investing/what-are-etfs/#v-mutual) - [ETFs vs. stocks](https://www.bankrate.com/investing/what-are-etfs/#v-stocks) - [Are ETFs good for beginners?](https://www.bankrate.com/investing/what-are-etfs/#beginners) - [Are ETFs a good investment?](https://www.bankrate.com/investing/what-are-etfs/#good) Table of contents Back to top Exchange-traded funds, or ETFs, are one of the hottest investing trends of the last two decades. ETFs held about \$11 trillion in assets at year-end 2023, according to research conducted by TrackInsight in collaboration with J.P. Morgan, reaching historic highs for the fast-growing asset class. ETFs allow investors to buy a collection of assets in just one fund, and they trade on an exchange like a stock. They’re popular because they meet the needs of investors, and usually for low cost. Here’s what you need to know about ETFs and why so many investors are drawn to them. ## ![](https://navi.cohesionapps.com/display?write_key=wk_2M3TlVcWbz8i1RTZjLkSmbWfyQC&adId=a7c8c4b068&req=https%3A%2F%2Fwww.bankrate.com%2Finvesting%2Fwhat-are-etfs%2F&ref=) ## What is an ETF and how does it work? ETFs are a type of fund that owns various kinds of securities, often of one type. For example, a stock ETF holds stocks, while a bond ETF holds bonds. One share of the ETF gives buyers ownership of all the stocks or bonds in the fund. For example, if an ETF held 100 stocks, then those who owned the fund would own a stake — a very tiny one — in each of those 100 stocks. [ETFs are typically passively managed](https://www.bankrate.com/investing/active-versus-passive/), meaning that the fund usually holds a fixed number of securities based on a specific preset index of investments. In contrast, many mutual funds are actively managed, with professional investors trying to select the investments that will rise and fall. For example, the [Standard & Poor’s 500 index](https://www.bankrate.com/investing/what-is-sp-500/) is perhaps the world’s best-known index, and it forms the basis of many ETFs. Other popular indexes include the Dow Jones Industrial Average and the [Nasdaq Composite index](https://www.bankrate.com/investing/what-is-nasdaq-composite/#:~:text=The%20Nasdaq%20Composite%20is%20an,number%20of%20technology-related%20companies.). ETFs based on these funds — they’re called index funds — just buy and hold whatever is in the index and make no active trading decisions. ETFs trade on a stock exchange during the day, unlike mutual funds that trade only after the market closes. With an ETF, you can place a trade whenever the market is open and know exactly the price you’re paying for the fund. For these benefits, ETFs charge an [expense ratio](https://www.bankrate.com/investing/what-is-an-expense-ratio/), which is the fee paid by investors for managing the fund. The advent of ETFs has caused the expense ratios of both mutual funds and ETFs to fall drastically over time, as cheap passively managed ETFs became popular. ## ## What are the major types of ETFs? ETFs come in a variety of flavors that cater to the needs of investors. ETFs chop up the market into industries, investment themes, valuation and other characteristics that investors care about. Here are some of the most popular ETF categories and what they include. Value stocks Stocks that look cheap relative to their earnings or assets. [Value ETFs](https://www.bankrate.com/investing/best-value-etfs/) are the funds that hold these stocks. Dividend stocks [Stocks that pay a dividend](https://www.bankrate.com/investing/high-dividend-stocks/) or have a strong payout record. Here are some of the [best dividend ETFs](https://www.bankrate.com/investing/best-dividend-etfs/). Industry Securities from companies in a specific industry, such as consumer goods. Major indexes Stocks based on a major index such as the S\&P 500 or the Nasdaq 100. Country Stocks with substantial exposure to a given country. Company size Own companies of a given size, typically either small, medium or large. Bonds Bonds sliced by any number of characteristics, including safety, duration and issuer. Commodity Investments in physical commodities ([gold, for example](https://www.bankrate.com/investing/best-gold-etfs/)) or producers of it. Inverse [Inverse ETFs](https://www.bankrate.com/investing/best-inverse-etfs/) go up when the price of the holdings go down, allowing investors to profit on the decline of securities. Fund managers can dissect the market into almost any number of characteristics if they think investors will be interested in buying the end product. ## ## Pros and cons of ETFs ETFs offer a number of important advantages to investors, especially in terms of investment choice, ease, and expense. But ETFs are also valuable because they allow investors to “slice and dice” the investing universe and gain exposure to specific investing “themes.” ### Pros - Investment choice: ETFs give investors new investment choices, because they create new securities as funds. With an ETF, you can [invest in an S\&P 500 index fund](https://www.bankrate.com/investing/how-to-buy-sp-500-index-fund/) right on the exchange, rather than having to buy a small piece of each stock. - Diversification: ETFs allow investors to easily achieve objectives [such as diversification](https://www.bankrate.com/investing/diversification-is-important-in-investing/). One fund can provide instant diversification, either across an industry or across the entire market. Investors can easily buy multiple funds that target each sector they’d like to own. - Low cost: ETFs can be relatively cheap as well, and they’ve only gotten cheaper over time. The asset-weighted average expense ratio of a stock index ETF was 0.14 percent in 2024, according to the Investment Company Institute, and the number has been falling for the last decade. It was even cheaper for bond index ETFs, with an expense ratio of just 0.10 percent. The [best index funds](https://www.bankrate.com/investing/best-index-funds/), such as those based on the S\&P 500, go for much cheaper than that even. The Vanguard S\&P 500 ETF (VOO), for example, costs 0.03 percent. - Focused investments: ETFs are also popular because they allow investors to create exposure to specific sectors or investing themes. For example, ETFs can focus on high-yield stocks or value-priced stocks. They can target biotech stocks or [companies with exposure to Brazil or India](https://www.bankrate.com/investing/how-to-invest-in-etfs/), for example. - More tax-efficient: ETFs are structured so that they make only minimal distributions of capital gains, keeping tax liabilities lower for investors. ### Cons of ETFs - Can be overvalued: ETFs can trade at a higher [net asset value](https://www.bankrate.com/investing/what-is-net-asset-value/) than their individual holdings. That is, investors may be able to pay more for the ETF than it actually owns. That said, this situation doesn’t happen often and the spread is rarely wide, but it can happen. In contrast, mutual funds always trade at their net asset value. - Not as focused as advertised: ETFs do not always offer the level of targeted exposure that they claim to. For example, some ETFs provide exposure to certain countries, and they’ll own companies based in that area. The issue is that often the large companies that comprise much of the fund earn a large portion of their sales from outside the targeted area. For instance, imagine an ETF that gives focused exposure to England, and to do so it owns, among many other companies, a stake in a British-based company such as Diageo, a maker of spirits. But Diageo also earns a huge percentage of its sales from outside the country. So an ETF can be much less focused on a specific niche than you would believe, given the fund’s name and purported target. So you often have to look into a fund’s holdings to understand what you actually own. ![](https://navi.cohesionapps.com/display?write_key=wk_2M3TlVcWbz8i1RTZjLkSmbWfyQC&adId=a3886bfd52&req=https%3A%2F%2Fwww.bankrate.com%2Finvesting%2Fwhat-are-etfs%2F&ref=) ## ## ETFs vs. mutual funds While mutual funds and ETFs have similar goals to own a wide variety of assets in one security, [they have many key differences](https://www.bankrate.com/investing/mutual-fund-vs-etf-which-is-better/), and those differences have helped ETFs thrive, especially in the last decade. Here are some of the main areas where these two kinds of funds differ. \| Category \| Mutual fund \| ETF \| \|---\|---\|---\| \| Average annual expense (2024)\* \| 0\.64 percent for actively managed stock funds; 0.47 for active bond funds; stock and bond index funds average 0.05 percent \| 0\.14 percent asset-weighted average for stock funds; 0.10 percent for bond funds \| \| Commission \| May run as high as \$50 at major brokers, though many brokers offer free trades on select funds \| Free at major online brokers \| \| Initial minimum \| Often a few thousand dollars unless purchased as part of a [401(k)](https://www.bankrate.com/retirement/401k/) or other retirement plan \| Usually just the cost of a single share, sometimes just \$10 or \$20, depending on the fund \| \| Management style \| Active and passive \| Mainly passive \| \| When does it trade? \| After the market closes \| When the exchange is open \| \| Investment strategies \| All kinds, value stocks, dividend stocks, bonds, indexes, etc. \| All kinds, value stocks, dividend stocks, bonds, indexes, etc. \| \| \| \| \According to the Investment Company Institute* \| The passive strategy used primarily by ETFs keeps management fees low, and this low cost is passed on to consumers in the form of low expense ratios. Over time, that’s put pressure on the expense ratios of mutual funds to come down in order to compete. ## ## ETFs vs. stocks While ETFs and [stocks](https://www.bankrate.com/investing/how-to-invest-in-stocks/) both trade throughout the day, there are some key differences between the two types of securities. A stock represents an ownership interest in a single company while an ETF holds a number of different stocks or other assets. A stock ETF may hold stock in hundreds of different companies, allowing its investors to hold a diversified portfolio by owning just one security: the ETF. That diversification reduces the risk for investors, compared to holding a single stock or just a few individual stocks. An ETF is generally less volatile than an individual stock, as well. ## ## Are ETFs good for beginners? ETFs are popular because they offer investors [a lot of valuable traits](https://www.bankrate.com/investing/how-to-invest-in-etfs/). And that’s especially [good for beginning investors](https://www.bankrate.com/investing/best-investments-for-beginners/). - Low minimum investment: The minimums for ETFs are usually the cost of just one share, which can vary from very little to perhaps a couple hundred dollars. Compare that with the minimum initial investment for a mutual fund, which might run into the thousands. And some brokers will even allow you [to buy fractions of shares](https://www.bankrate.com/investing/best-online-brokers-for-beginners/), so you don’t even need enough for a full share to get started. - Usually commission-free: On top of that, many brokers allow you to trade ETFs without a commission. [Charles Schwab](https://www.bankrate.com/investing/brokerage-reviews/charles-schwab/) and Fidelity are notable examples, but [Robinhood](https://www.bankrate.com/investing/brokerage-reviews/robinhood/) also offers all the ETFs on its platform without a trading fee. So you can get in the game at a very low cost. - Thematic: ETFs also allow investors to [buy into a specific investing theme](https://www.bankrate.com/investing/top-etf-categories-to-watch/) easily, even if they don’t know much about it. If you’re not a biotech expert, a focused biotech ETF will give you exposure to the industry, so you don’t have to pick and choose which companies are the winners. - Diversification: ETFs also offer instant diversification. You can buy one fund and own a specific set of companies that are focused on one area of the market, or even own the whole market. In either case, you get diversification and [the risk reduction that comes with it](https://www.bankrate.com/investing/diversification-is-important-in-investing/). - Own the market: Finally, ETFs also allow you to buy popular indexes such as the S\&P 500, letting you “own the market” and get the market return, which has averaged about 10 percent annually over time. It’s incredibly easy for investors to buy such an ETF and enjoy the market average with little investing work. Here are [some top ETFs](https://www.bankrate.com/investing/best-etfs/) to consider this year. ## ## Are ETFs a good investment? How an ETF performs depends entirely on the stocks, bonds and other assets that it’s invested in. If the fund’s investments rise, then the ETF will rise as well. If its investments fall in value, the ETF’s price will fall, too. In short, the performance of the ETF is just a weighted average of all its holdings. So not all ETFs are created equal, and it’s important to know what your ETF is invested in. But the structure of an ETF is a good setup for investors, largely due to their low costs. ETFs tend to have low expense ratios — the cheapest funds cost just a few dollars annually for each \$10,000 invested. In large part, that’s because they’re passive investments, meaning that they use preset indexes to determine what they own, rather than paying high-priced investment managers to actively scour the market for the best holdings. The goal of a passive ETF is to track the performance of the index that it follows, not beat it. In addition, ETFs also give you all the benefits listed above: low investment minimums, diversification, a focused or thematic investment and a wide choice of funds. ## Bottom line ETFs have proven incredibly popular in the last few decades, and that popularity is set to continue. One of the most popular investing strategies — buying and holding an S\&P 500 index fund — has been [recommended by legendary investor Warren Buffett](https://www.bankrate.com/investing/good-investment-advice-to-follow/). While the influx of cash to ETFs might hiccup when the market fluctuates, the long-term trend toward ETF investing looks clear. Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation. Did you find this page helpful? Why we ask for feedback Your feedback helps us improve our content and services. It takes less than a minute to complete. Your responses are anonymous and will only be used for improving our website. Help us improve our content Yes No Thank you for your feedback\! Your input helps us improve our content and services. Cite us Share this article Share this article Close ![](https://www.bankrate.com/2021/10/26151853/James-Royal-headshot-scaled-square.jpg?auto=webp&quality=85&width=96&height=96&fit=cover&enable=upscale&crop=1:1,smart) Written by [James Royal, Ph.D.](https://www.bankrate.com/authors/james-royal/) Former Principal Writer, Investing and Wealth Management - [Connect with James Royal, Ph.D. on Twitter](https://twitter.com/JimRoyalPhD) - [Connect with James Royal, Ph.D. on LinkedIn](https://www.linkedin.com/in/james-royal-phd-809b929/) - [Get in contact with James Royal, Ph.D. via Email](mailto:jroyal@redventures.com) [Read more from James](https://www.bankrate.com/authors/james-royal/) Former Bankrate principal writer and editor James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more. ![Person being lifted into the air by balloons. Across each balloon is a letter, spelling out ETF?](https://www.bankrate.com/brp/2024/03/17182855/Investments_What-is-an-ETF_-Learn-about-exchange-traded-funds.jpg?auto=webp&optimize=high&crop=16:9) Images by Getty Images; Illustration by Issiah Davis/Bankrate Bankrate is always editorially independent. While we adhere to strict editorial integrity , this post may contain references to products from our partners. Here's an explanation for how we make money . Our Bankrate promise is to ensure everything we publish is objective, accurate and trustworthy. Table of contents - [What is an ETF and how does it work?](https://www.bankrate.com/investing/what-are-etfs/#what-is) - [Types of ETFs](https://www.bankrate.com/investing/what-are-etfs/#types) - [Pros and cons of ETFs](https://www.bankrate.com/investing/what-are-etfs/#pros-cons) - [ETFs vs. mutual funds](https://www.bankrate.com/investing/what-are-etfs/#v-mutual) - [ETFs vs. stocks](https://www.bankrate.com/investing/what-are-etfs/#v-stocks) - [Are ETFs good for beginners?](https://www.bankrate.com/investing/what-are-etfs/#beginners) - [Are ETFs a good investment?](https://www.bankrate.com/investing/what-are-etfs/#good) Back to top ## Up next Part of Basics of ETF Investing ![Wood blocks that say ETF are stacked among coins on a blue background.](https://www.bankrate.com/brp/2025/05/15114612/How_to_Invest_in_ETFs-300x169.jpg) [How to invest in ETFs: A 3-step guide for beginners](https://www.bankrate.com/investing/how-to-invest-in-etfs/?series=basics-of-etf-investing) Investing By [James Royal, Ph.D.](https://www.bankrate.com/authors/james-royal/) 7 min read ![A man and a woman choose which ice cream they want](https://www.bankrate.com/2022/04/15101138/Stocks-vs-ETFs.jpeg) [Stocks vs. ETFs: Which should you invest in?](https://www.bankrate.com/investing/stocks-vs-etfs/?series=basics-of-etf-investing) Investing By [James Royal, Ph.D.](https://www.bankrate.com/authors/james-royal/) 7 min read ![A young couple look at their laptop computer in a cottage](https://www.bankrate.com/2021/07/06175630/Best-ETFs.jpeg) [Best ETFs for May 2023](https://www.bankrate.com/investing/best-etfs/?series=basics-of-etf-investing) Investing By [James Royal, Ph.D.](https://www.bankrate.com/authors/james-royal/) 17 min read ## [Bankrate logo](https://www.bankrate.com/) ### About - [About us](https://www.bankrate.com/about/) - [Leadership](https://www.bankrate.com/leadership/) - [Press room](https://www.bankrate.com/press-releases/) - [Bankrate Data Center](https://www.bankrate.com/data-center/) - [Careers](https://www.bankrate.com/careers/) - [Site map](https://www.bankrate.com/corporate/site-map/) ### Help - [Compare rates](https://www.bankrate.com/compare-rates/) - [Latest news](https://www.bankrate.com/news/) - [Popular topics](https://www.bankrate.com/popular-finance-topics/) - [Advertise with us](https://www.bankrate.com/media-kit/) ### Legal - [Privacy policy](https://www.bankrate.com/privacy/) - Cookie settings - [Do Not Sell or Share My Personal Information](https://www.bankrate.com/do-not-sell-or-share-my-personal-information/) - [Consumer Health Information Privacy Policy](https://www.bankrate.com/consumer-health-information-privacy-policy/) - [Understanding Bankrate’s averages](https://www.bankrate.com/understanding-bankrates-rate-averages/) - [Terms of use](https://www.bankrate.com/terms/) - [GLBA annual notice](https://www.bankrate.com/glba-notice/) - [California Consumer Financial Privacy Notice](https://www.bankrate.com/2022/02/15094901/california-notice.pdf) - [Licenses](https://www.bankrate.com/licenses/) ### How we make money Bankrate.com is an independent, advertising-supported publisher and comparison service. 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Table of contents - [What is an ETF and how does it work?](https://www.bankrate.com/investing/what-are-etfs/#what-is) - [Types of ETFs](https://www.bankrate.com/investing/what-are-etfs/#types) - [Pros and cons of ETFs](https://www.bankrate.com/investing/what-are-etfs/#pros-cons) - [ETFs vs. mutual funds](https://www.bankrate.com/investing/what-are-etfs/#v-mutual) - [ETFs vs. stocks](https://www.bankrate.com/investing/what-are-etfs/#v-stocks) - [Are ETFs good for beginners?](https://www.bankrate.com/investing/what-are-etfs/#beginners) - [Are ETFs a good investment?](https://www.bankrate.com/investing/what-are-etfs/#good) Quick citation guide Select a citation to automatically copy to clipboard. APA: Royal, J. (2025, April 18). What is an ETF? Learn about exchange-traded funds. Bankrate. Retrieved April 09, 2026, from https://www.bankrate.com/investing/what-are-etfs/ Copied to clipboard\! MLA: Royal, James. "What is an ETF? Learn about exchange-traded funds." Bankrate. 18 April 2025, https://www.bankrate.com/investing/what-are-etfs/. Copied to clipboard\! Chicago: Royal, James. "What is an ETF? Learn about exchange-traded funds." Bankrate. April 18, 2025. https://www.bankrate.com/investing/what-are-etfs/. Copied to clipboard\! ![](https://www.facebook.com/tr?id=1805085980359671&ev=PageView&noscript=1) ![](https://www.facebook.com/tr?id=1564326531369118&ev=PageView&noscript=1)
Readable Markdown	Exchange-traded funds, or ETFs, are one of the hottest investing trends of the last two decades. ETFs held about \$11 trillion in assets at year-end 2023, according to research conducted by TrackInsight in collaboration with J.P. Morgan, reaching historic highs for the fast-growing asset class. ETFs allow investors to buy a collection of assets in just one fund, and they trade on an exchange like a stock. They’re popular because they meet the needs of investors, and usually for low cost. Here’s what you need to know about ETFs and why so many investors are drawn to them. ## What is an ETF and how does it work? ETFs are a type of fund that owns various kinds of securities, often of one type. For example, a stock ETF holds stocks, while a bond ETF holds bonds. One share of the ETF gives buyers ownership of all the stocks or bonds in the fund. For example, if an ETF held 100 stocks, then those who owned the fund would own a stake — a very tiny one — in each of those 100 stocks. [ETFs are typically passively managed](https://www.bankrate.com/investing/active-versus-passive/), meaning that the fund usually holds a fixed number of securities based on a specific preset index of investments. In contrast, many mutual funds are actively managed, with professional investors trying to select the investments that will rise and fall. For example, the [Standard & Poor’s 500 index](https://www.bankrate.com/investing/what-is-sp-500/) is perhaps the world’s best-known index, and it forms the basis of many ETFs. Other popular indexes include the Dow Jones Industrial Average and the [Nasdaq Composite index](https://www.bankrate.com/investing/what-is-nasdaq-composite/#:~:text=The%20Nasdaq%20Composite%20is%20an,number%20of%20technology-related%20companies.). ETFs based on these funds — they’re called index funds — just buy and hold whatever is in the index and make no active trading decisions. ETFs trade on a stock exchange during the day, unlike mutual funds that trade only after the market closes. With an ETF, you can place a trade whenever the market is open and know exactly the price you’re paying for the fund. For these benefits, ETFs charge an [expense ratio](https://www.bankrate.com/investing/what-is-an-expense-ratio/), which is the fee paid by investors for managing the fund. The advent of ETFs has caused the expense ratios of both mutual funds and ETFs to fall drastically over time, as cheap passively managed ETFs became popular. ## What are the major types of ETFs? ETFs come in a variety of flavors that cater to the needs of investors. ETFs chop up the market into industries, investment themes, valuation and other characteristics that investors care about. Here are some of the most popular ETF categories and what they include. Value stocks Stocks that look cheap relative to their earnings or assets. [Value ETFs](https://www.bankrate.com/investing/best-value-etfs/) are the funds that hold these stocks. Industry Securities from companies in a specific industry, such as consumer goods. Major indexes Stocks based on a major index such as the S\&P 500 or the Nasdaq 100. Country Stocks with substantial exposure to a given country. Company size Own companies of a given size, typically either small, medium or large. Bonds Bonds sliced by any number of characteristics, including safety, duration and issuer. Commodity Investments in physical commodities ([gold, for example](https://www.bankrate.com/investing/best-gold-etfs/)) or producers of it. Inverse [Inverse ETFs](https://www.bankrate.com/investing/best-inverse-etfs/) go up when the price of the holdings go down, allowing investors to profit on the decline of securities. Fund managers can dissect the market into almost any number of characteristics if they think investors will be interested in buying the end product. ## Pros and cons of ETFs ETFs offer a number of important advantages to investors, especially in terms of investment choice, ease, and expense. But ETFs are also valuable because they allow investors to “slice and dice” the investing universe and gain exposure to specific investing “themes.” ### Pros - Investment choice: ETFs give investors new investment choices, because they create new securities as funds. With an ETF, you can [invest in an S\&P 500 index fund](https://www.bankrate.com/investing/how-to-buy-sp-500-index-fund/) right on the exchange, rather than having to buy a small piece of each stock. - Diversification: ETFs allow investors to easily achieve objectives [such as diversification](https://www.bankrate.com/investing/diversification-is-important-in-investing/). One fund can provide instant diversification, either across an industry or across the entire market. Investors can easily buy multiple funds that target each sector they’d like to own. - Low cost: ETFs can be relatively cheap as well, and they’ve only gotten cheaper over time. The asset-weighted average expense ratio of a stock index ETF was 0.14 percent in 2024, according to the Investment Company Institute, and the number has been falling for the last decade. It was even cheaper for bond index ETFs, with an expense ratio of just 0.10 percent. The [best index funds](https://www.bankrate.com/investing/best-index-funds/), such as those based on the S\&P 500, go for much cheaper than that even. The Vanguard S\&P 500 ETF (VOO), for example, costs 0.03 percent. - Focused investments: ETFs are also popular because they allow investors to create exposure to specific sectors or investing themes. For example, ETFs can focus on high-yield stocks or value-priced stocks. They can target biotech stocks or [companies with exposure to Brazil or India](https://www.bankrate.com/investing/how-to-invest-in-etfs/), for example. - More tax-efficient: ETFs are structured so that they make only minimal distributions of capital gains, keeping tax liabilities lower for investors. ### Cons of ETFs - Can be overvalued: ETFs can trade at a higher [net asset value](https://www.bankrate.com/investing/what-is-net-asset-value/) than their individual holdings. That is, investors may be able to pay more for the ETF than it actually owns. That said, this situation doesn’t happen often and the spread is rarely wide, but it can happen. In contrast, mutual funds always trade at their net asset value. - Not as focused as advertised: ETFs do not always offer the level of targeted exposure that they claim to. For example, some ETFs provide exposure to certain countries, and they’ll own companies based in that area. The issue is that often the large companies that comprise much of the fund earn a large portion of their sales from outside the targeted area. For instance, imagine an ETF that gives focused exposure to England, and to do so it owns, among many other companies, a stake in a British-based company such as Diageo, a maker of spirits. But Diageo also earns a huge percentage of its sales from outside the country. So an ETF can be much less focused on a specific niche than you would believe, given the fund’s name and purported target. So you often have to look into a fund’s holdings to understand what you actually own. ## ETFs vs. mutual funds While mutual funds and ETFs have similar goals to own a wide variety of assets in one security, [they have many key differences](https://www.bankrate.com/investing/mutual-fund-vs-etf-which-is-better/), and those differences have helped ETFs thrive, especially in the last decade. Here are some of the main areas where these two kinds of funds differ. \| Category \| Mutual fund \| ETF \| \|---\|---\|---\| \| Average annual expense (2024)\* \| 0\.64 percent for actively managed stock funds; 0.47 for active bond funds; stock and bond index funds average 0.05 percent \| 0\.14 percent asset-weighted average for stock funds; 0.10 percent for bond funds \| \| Commission \| May run as high as \$50 at major brokers, though many brokers offer free trades on select funds \| Free at major online brokers \| \| Initial minimum \| Often a few thousand dollars unless purchased as part of a [401(k)](https://www.bankrate.com/retirement/401k/) or other retirement plan \| Usually just the cost of a single share, sometimes just \$10 or \$20, depending on the fund \| \| Management style \| Active and passive \| Mainly passive \| \| When does it trade? \| After the market closes \| When the exchange is open \| \| Investment strategies \| All kinds, value stocks, dividend stocks, bonds, indexes, etc. \| All kinds, value stocks, dividend stocks, bonds, indexes, etc. \| \| \| \| \According to the Investment Company Institute* \| The passive strategy used primarily by ETFs keeps management fees low, and this low cost is passed on to consumers in the form of low expense ratios. Over time, that’s put pressure on the expense ratios of mutual funds to come down in order to compete. ## ETFs vs. stocks While ETFs and [stocks](https://www.bankrate.com/investing/how-to-invest-in-stocks/) both trade throughout the day, there are some key differences between the two types of securities. A stock represents an ownership interest in a single company while an ETF holds a number of different stocks or other assets. A stock ETF may hold stock in hundreds of different companies, allowing its investors to hold a diversified portfolio by owning just one security: the ETF. That diversification reduces the risk for investors, compared to holding a single stock or just a few individual stocks. An ETF is generally less volatile than an individual stock, as well. ## Are ETFs good for beginners? ETFs are popular because they offer investors [a lot of valuable traits](https://www.bankrate.com/investing/how-to-invest-in-etfs/). And that’s especially [good for beginning investors](https://www.bankrate.com/investing/best-investments-for-beginners/). - Low minimum investment: The minimums for ETFs are usually the cost of just one share, which can vary from very little to perhaps a couple hundred dollars. Compare that with the minimum initial investment for a mutual fund, which might run into the thousands. And some brokers will even allow you [to buy fractions of shares](https://www.bankrate.com/investing/best-online-brokers-for-beginners/), so you don’t even need enough for a full share to get started. - Usually commission-free: On top of that, many brokers allow you to trade ETFs without a commission. [Charles Schwab](https://www.bankrate.com/investing/brokerage-reviews/charles-schwab/) and Fidelity are notable examples, but [Robinhood](https://www.bankrate.com/investing/brokerage-reviews/robinhood/) also offers all the ETFs on its platform without a trading fee. So you can get in the game at a very low cost. - Thematic: ETFs also allow investors to [buy into a specific investing theme](https://www.bankrate.com/investing/top-etf-categories-to-watch/) easily, even if they don’t know much about it. If you’re not a biotech expert, a focused biotech ETF will give you exposure to the industry, so you don’t have to pick and choose which companies are the winners. - Diversification: ETFs also offer instant diversification. You can buy one fund and own a specific set of companies that are focused on one area of the market, or even own the whole market. In either case, you get diversification and [the risk reduction that comes with it](https://www.bankrate.com/investing/diversification-is-important-in-investing/). - Own the market: Finally, ETFs also allow you to buy popular indexes such as the S\&P 500, letting you “own the market” and get the market return, which has averaged about 10 percent annually over time. It’s incredibly easy for investors to buy such an ETF and enjoy the market average with little investing work. Here are [some top ETFs](https://www.bankrate.com/investing/best-etfs/) to consider this year. ## Are ETFs a good investment? How an ETF performs depends entirely on the stocks, bonds and other assets that it’s invested in. If the fund’s investments rise, then the ETF will rise as well. If its investments fall in value, the ETF’s price will fall, too. In short, the performance of the ETF is just a weighted average of all its holdings. So not all ETFs are created equal, and it’s important to know what your ETF is invested in. But the structure of an ETF is a good setup for investors, largely due to their low costs. ETFs tend to have low expense ratios — the cheapest funds cost just a few dollars annually for each \$10,000 invested. In large part, that’s because they’re passive investments, meaning that they use preset indexes to determine what they own, rather than paying high-priced investment managers to actively scour the market for the best holdings. The goal of a passive ETF is to track the performance of the index that it follows, not beat it. In addition, ETFs also give you all the benefits listed above: low investment minimums, diversification, a focused or thematic investment and a wide choice of funds. ## Bottom line ETFs have proven incredibly popular in the last few decades, and that popularity is set to continue. One of the most popular investing strategies — buying and holding an S\&P 500 index fund — has been [recommended by legendary investor Warren Buffett](https://www.bankrate.com/investing/good-investment-advice-to-follow/). While the influx of cash to ETFs might hiccup when the market fluctuates, the long-term trend toward ETF investing looks clear. Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation. Did you find this page helpful? Help us improve our content
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