🕷️ Crawler Inspector

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1. Shard Calculation

Query:

Response:

Calculated Shard: 181 (from laksa001)

2. Crawled Status Check

Query:

curl -X POST \
  'http://laksa181.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.businessinsider.com/personal-finance/investing/what-is-an-etf\')), getAhrefsUnparsedNoserviceFromURL(\'https://www.businessinsider.com/personal-finance/investing/what-is-an-etf\'))) FORMAT JSONEachRow'

Response:

{"found_url":"https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-an-etf","crawl_time":1776228328,"first_indexed_time":1721105260,"http_code":200,"src_unparsed":"com,businessinsider!www,\/personal-finance\/investing\/what-is-an-etf s443","src_root_hash":"15170859634011428381","history_drop_reason":null,"meta_title":"What Is an ETF: 2025 Beginner's Guide","meta_descriptions":["Understand Exchange-Traded Funds (ETFs): what they are, how they work, and their benefits. Discover if ETFs are right for your investment portfolio."],"attrs_boilerpipe_text":"Updated\n2025-04-25T15:41:49.587Z\nAn exchange-traded fund (ETF) represents a basket of securities that's traded on a stock exchange.\nWhile many ETFs track indexes, some are actively managed.\nETFs have some advantages over mutual funds, but certain niche ETFs aren't always as liquid as some mutual funds.\nExchange-traded funds (ETFs) have become one of the most popular investment products offered by many of the\nbest investment apps\n. Investing in exchange-traded funds provides a low-cost and convenient way to diversify your portfolio, since you can gain access to a large pool of underlying assets within one investment.\nHowever, not all ETFs are the same. Some track broad stock market indexes, while others are sector-specific. And while they resemble mutual funds in many ways, there can be some pros and cons to choosing ETFs over other investments.\nSo, before investing in ETFs, you'll want to understand what these funds involve, including the costs and risks, along with ETF benefits.\nETF definition\nAn ETF represents a basket of securities that is traded on\nstock market\nexchanges, much like any other stock. Technically, when you purchase a share of the ETF, you become a partial owner of the fund itself, but you're primarily gaining exposure to a wide range of underlying stocks or other assets, such as\nbonds\nor\ncommodities\n. Your investment could increase or decrease in value as the prices of the underlying assets change.\nIn many ways, an ETF is like a\nmutual fund\n, in that you're buying shares in an investment vehicle that uses investor capital to trade underlying securities, although the process differs a bit between them.\nFor the average investor, one of the main things to know is that because ETFs trade on stock exchanges, their pricing updates in real time, and you can trade them throughout the day. In contrast, mutual funds only update their pricing and can be traded once per day, after the market closes.\n\"Exchange-traded refers to the fund being able to be bought and sold during the trading day,\" says Curtis Bailey, a CFA, chief compliance officer and financial advisor at\nQuiet Wealth Management\n. \"A fund is an ownership structure that allows an investor to own a portion of an underlying basket of securities.\"\nHow ETFs work\nETFs can be a little confusing when you dig deep into all the details, but for what the average investor experiences, they're usually easy to understand and trade.\nCreation and structure of ETFs\nAn ETF is created when a financial institution registers with the\nSecurities and Exchange Commission\n(SEC) to act as the fund sponsor\/ETF manager, who is responsible for creating and redeeming ETF shares and managing the fund overall.\nETF fund sponsors work with authorized participants (APs) — typically large broker-dealers — who buy the underlying securities that comprise the ETF. The AP then delivers those securities to the fund sponsor, who provides the AP with ETF shares that the AP then sells on the stock exchange.\nFrom there, the ETF shares can be bought and sold by any investor much like any other\nstock\n. You can even typically purchase ETFs on\nmargin\nand place\nlimit orders\nlike you can with stocks, though make sure you understand the risks involved with those approaches.\nAPs can also reverse the process by delivering ETF shares to the fund sponsor, who then retires those shares and delivers the underlying securities to the AP, such as if lots of ETF investors are selling their shares and the AP needs to bring the ETF price in line with the value of the underlying securities.\nThis creation\/redemption process isn't something that individual investors get involved with, nor is it necessarily something that they need to focus on. The main thing to know is that this interplay between the AP and ETF sponsor is what gives ETFs their intraday liquidity and enables the net asset value (NAV) — the price an ETF trades at — to accurately reflect what the underlying basket of securities is worth.\nAlso, this creation\/redemption process is the mechanism that allows ETFs to avoid triggering\ncapital gains taxes\nthe way that mutual funds do.\nEssentially, mutual fund shareholders face capital gains based on the overall trading activity of the fund, because the mutual fund is actually buying and selling securities. In contrast, ETFs are not exactly buying and selling the underlying securities, but rather they're making exchanges with the AP, which means ETF shareholders aren't incurring taxes on the underlying security sales.\nSo, ETF shareholders only face capital gains based on their individual activity when buying and selling ETF shares. That can be particularly advantageous for those who want to hold ETFs long-term in a taxable account, as you can avoid capital gains during the years when you hold onto your assets.\nTrading on exchanges\nAs the name implies, ETFs trade on exchanges — typically stock exchanges where you would find commonly traded stocks, like the New York Stock Exchange or NASDAQ. This helps make ETFs highly accessible. Most investors can simply open their\nbrokerage app\nand place a buy or sell order for an ETF, just as they can for most stocks.\nLike with stocks, you may have to pay a transaction fee to your brokerage for each ETF trade. That fee, however, is exclusive to the brokerage, rather than being something that the ETF collects. Instead, ETFs have a percentage-based annual fee, like mutual funds, known as an expense ratio, which the ETF sponsor charges for running the fund.\n\"The largest ETFs often have really low fees,\" says Bailey. \"[But] some ETFs have higher expense ratios than actively managed mutual funds.\"\nThe exchange price of an ETF typically reflects the underlying value of the securities the fund holds — for example, an ETF that tracks the S&P 500 will generally go up or down in unison (on a percentage basis, since the actual share price differs depending on the fund) with how those 500 companies in the S&P 500 perform.\nHowever, it's important to note that tracking errors or tracking differences — such as if the ETF holds slightly different securities than the benchmark index — could lead to a small discrepancy between the ETF's price and the value of the underlying assets in some cases, such as during periods of unusually high or low demand for an ETF.\nETF tracking error\/tracking difference\nAs mentioned, ETFs don't always perfectly follow the pricing of their underlying securities. Tracking difference is the gap between the return of an investment\/investment portfolio and the return of a chosen benchmark that the investment\/portfolio is meant to follow. While this is often called tracking error, technically a tracking error is the representation of tracking difference as an annualized standard deviation percentage. For example, an ETF with a 0.1% tracking error typically varies 0.1% above or below the benchmark over the course of a year, though it's still possible to fall outside this standard range.\nA related phenomenon is how there can be a difference between the price people are willing to buy and sell shares of the ETF. The bid\/ask spread — which is the difference between the offer\/sell (ask) price and the purchase\/buy (bid) price of a security — can essentially affect your individual tracking difference. With a wide bid\/ask spread, such as on some less commonly traded ETFs, you might pay more than the market price in order to acquire those shares.\n\"This spread may represent an additional hidden cost as an investor pays more to buy the shares and receives less to sell the shares,\" says Bailey.\nETFs vs. mutual funds vs. index funds\nETFs, mutual funds, and index funds share some similarities, but they are not interchangeable terms.\nAs mentioned, an ETF is a fund that trades on an exchange and represents ownership of a pool of securities. ETFs have real-time pricing based on trading activity\/underlying security prices, and they can be bought and sold throughout the trading day when the stock market is open (and sometimes after hours, depending on the brokerage).\nMutual funds also hold a basket of securities. However, unlike ETFs, mutual funds are not traded on stock exchanges. Instead, a broker typically facilitates buy and sell orders between investors and the mutual fund company, or you might transact directly with the mutual fund company. As part of not being exchange-traded, mutual funds are only priced once per day after the market closes, based on the underlying security prices.\nMutual funds often have higher initial minimum investment requirements and fees than ETFs, though it depends on the specific funds. However, mutual funds can hold advantages over ETFs, like sometimes being easier for buying fractional shares.\nSome ETFs, particularly ones with niche themes, might also be less\nliquid\nthan some mutual funds. Although mutual funds don't have intraday liquidity, they arguably provide greater overall liquidity in the sense that the fund manager acts as a guaranteed trade partner and there's no bid\/ask spread — the fund manager simply offers the price at which it will accept buy or sell orders. There are other important differences between\nmutual funds and ETFs\nfor investors to consider as well, but the specifics vary based on the funds you're comparing.\nAn\nindex fund\nis a general term for a fund that tracks an index. Both ETFs and mutual funds could be index funds. A common simplification is that ETFs tend to track index funds while mutual funds are often actively managed, but you should not assume that's always the case. Look at the specific details for any fund you're considering.\n\"It's important to understand the fund's underlying investments, strategy, and costs,\" says Bailey.\nETF benefits\nInvesting in ETFs provides several potential benefits, sometimes even above what individual stocks or mutual funds provide. The exact benefits depend on which ETF you're considering and what the alternatives are, but in general, some of the top pros of ETFs include the following:\nDiversification\nETFs offer\ndiversification\nby providing exposure to a basket of assets. So while you might just be buying one ETF, your investment is generally more diversified than investing in the stock of one individual company. That said, the level of diversification varies depending on the type of ETF.\nLiquidity\nETFs tend to be highly liquid in the sense that you can typically buy and sell ETF shares as you wish throughout the trading day. Even if the underlying assets aren't very liquid, like if an ETF holds some private investments, the structure of the fund could provide some additional liquidity.\nMutual funds are generally liquid, too, though it depends on the specific fund and how you look at liquidity. Some investors prefer the intraday\nliquidity\nof an ETF, while others prefer how mutual funds have no bid\/ask spread, for example, as the fund manager always acts as a clear buyer or seller.\nLow costs\nETFs tend to have lower expense ratios and lower investment minimums than mutual funds, though it depends on the type of fund. If you can find a brokerage that has low or no transaction fees, that can also help keep ETF costs down. That said, individual stocks do not have fund management fees like ETFs or mutual funds do.\nTax efficiency\nConnected to low costs, ETFs tend to be more tax-efficient than mutual funds. That's because the structure of ETFs enables the creation and redemption of shares by APs to not trigger capital gains, whereas the activities of other investors in a mutual fund affect the overall fund's taxes. The best way to think about the difference is that ETFs are only taxed based on when you sell your shares or receive dividends, while mutual funds are also taxed based on the capital gains of the fund overall, even if you hold onto your shares.\nTransparency\nETFs may seem complex at times, but they are transparent in the sense that expense ratios are clearly disclosed, and they typically disclose holdings on a daily basis, so you can understand what you're investing in. This is similar to the transparency of mutual funds, although mutual funds usually disclose holdings only on a monthly or quarterly basis; yet both are more transparent than some other vehicles like hedge funds.\nRisks of investing in ETFs\nWhile ETFs offer several benefits, there are also several risks to watch out for, such as:\nMarket risk\nLike with any tradable asset, the value of ETFs can fluctuate based on what's happening with the overall market. You might invest in a well-managed ETF, but if investors are selling the declining stocks of the companies that the ETF invests in, then the ETF will generally follow suit in losing value.\nAlso, some more exotic ETFs use leverage or short stocks (or gain short exposure through assets like derivatives), which can amplify losses more than if you invested directly in the underlying stocks.\nTracking error\/tracking difference\nBecause ETFs are tradable securities, the price might not always reflect the underlying assets or the benchmark it tracks. It's possible, for example, that high demand for an ETF temporarily drives up the price above what the underlying securities are worth, which could cause the overall returns to slightly lag the benchmark.\nLiquidity risk\nWhile the liquidity of ETFs is generally seen as a positive, there are also some risks to consider. For one, less popular ETFs might not have much trading activity, so the bid\/ask spreads could be wide, causing investors to essentially incur higher trading costs that affect net returns. Also, some argue that the intraday liquidity of ETFs makes them susceptible to overtrading, whereas you might feel more capable of taking a set-it-and-forget-it approach with mutual funds.\nTypes of ETFs\nOne way of categorizing ETFs is by management style. In that sense, there are two main types of ETFs: index-based ETFs and actively managed ETFs. Index-based ETFs are\npassively managed investments\nand track an index — a grouping of individual assets that share a common feature. For example, the\nS&P 500\nis an index of the stocks of the 500 largest public companies in the US. Most ETFs are passively managed.\nThen there are actively managed ETFs, which generally aren't passively following an index. Instead, they often have a benchmark index and a fund manager or team tries to outperform the benchmark by trading assets a little differently than what the index does.\nOne actively managed ETF example might be a fund that includes only certain companies within the S&P 500, rather than the whole index. Or, the fund manager might frequently buy and sell the stocks of S&P 500 companies to try to capture an edge, rather than just holding these assets. Generally, you'll pay higher fees for an actively managed ETF.\nThat said, it's possible for an ETF to combine elements of passive and active, such as if a fund follows a custom index.\nWhether an ETF is passive or active, there can also be some different types of ETFs, such as the following:\nStock ETFs\nStock or equity ETFs often track a specific index of stocks. The index may be based on the companies' size, region, industry, or other commonalities. That said, a stock\/equity ETF could be actively managed based on the stocks the fund manager thinks will perform well.\nBond ETFs\nBond or fixed-income ETFs track a portfolio of bonds or similar fixed-income assets, such as corporate and government debt.\nCommodity ETFs\nCommodity ETFs track the price of raw materials, such as gold or oil, perhaps by using futures contracts or holding physical assets.\nInternational ETFs\nInternational ETFs track companies from a specific country or region. These are often types of equity ETFs, but a bond ETF could also represent a basket of international fixed-income securities.\nSpecialty ETFs\nThere are many types of niche or specialty ETFs, such as those that track certain industries or follow investment themes like allocating to\nESG investing\nin socially conscious companies. There are now even ETFs that track\ncryptocurrency\n.\nReal ETF examples\nWith the different types of ETFs in mind, here are some real ETF examples:\nSPDR S&P 500 ETF Trust (SPY)\nis one of the first and most popular equity ETFs. It tracks the S&P 500.\nInvesco QQQ Trust (QQQ)\nis another popular equity ETF. It tracks the Nasdaq-100 Index, which is made up of the largest non-financial companies on the\nNasdaq stock exchange\n.\nVanguard Total International Stock Index Fund ETF Shares (VXUS)\nis an international equity ETF that tracks the FTSE Global All Cap ex US Index, an index representing a broad range of public companies outside the U.S.\niShares Global Clean Energy ETF (ICLN)\nis a sector and thematic ETF that tracks the S&P Global Clean Energy Index.\nARK Innovation ETF (ARKK)\nis a large, actively managed ETF that primarily invests in companies that create and use innovative technology.\nHow to invest in ETFs\nInvesting in ETFs is typically easy. You can buy and sell ETFs through a brokerage account by simply placing a buy or sell order, just as you would for other stocks.\nThe exact ETFs available can differ by brokerage, but most online brokerage accounts\/investing platforms offer ETFs in some capacity. But not all investing apps and brokerages do, so make sure to do your research before signing up.\nBeginners may have the best luck accessing ETFs with one of the\nbest robo-advisors\nor the\nbest investment apps for beginners\n. These platforms might serve as a good ETF guide by recommending certain ETFs to you, based on factors like your risk tolerance and investment style. But if you're a more hands-on investor, you can use online screeners and your brokerage's trading function to find ETFs that fit your investment goals.\n\"Every investor should consider ETFs,\" says Bailey. \"They are typically more tax-efficient and lower cost than mutual funds and offer diversification that would be hard to mimic through individual positions.\"\nHowever, complex and high-risk ETFs are also available. Before making an investment decision, consider how the particular ETF could impact your portfolio and how it compares to other types of funds.\nStart investing\nFAQs about ETFs\nThe main difference between ETFs and mutual funds is that an ETF trades on a stock exchange, while a mutual fund only trades via a broker. As such, there are differences, such as ETFs having intraday liquidity. ETFs also often have tax advantages and lower costs.\nFor many investors, ETFs are suitable for long-term, low-cost investing, but it depends on the specific ETF and the investor. A common long-term approach with ETFs is to buy and hold a low-cost ETF that tracks a diversified index like the S&P 500.\nAn ETF might be better than an individual stock in terms of gaining quick diversification to a broad array of holdings, but the risk\/reward can vary, depending on the type of ETF and stock.\nYes, many ETFs pay dividends, based on the underlying holdings, such as fixed-income securities or dividend-paying stocks. However, dividend rates vary significantly by fund.\nThe downsides to ETFs depend on the context, but some common negatives include the risk of investment losses, tracking error\/tracking difference vs. an index, higher fees than investing directly in stocks (but lower than many mutual funds), and sometimes limited liquidity, which can widen bid\/ask spreads. ETFs also might have downsides vs. mutual funds, such as not always enabling fractional investing.\nJake Safane is a freelance writer specializing in finance and sustainability. He runs a corporate sustainability blog,\nCarbon Neutral Copy\n, and his work has appeared in publications such as The Economist, CBS MoneyWatch, and the Los Angeles Times.\nExperience\nJake has been working in financial journalism since 2011, covering areas such as banking and investing for both businesses and individuals. \nHis career has included a mix of in-house reporting jobs at B2B finance publications such as Global Custodian and FundFire, a role in sponsored research at The Economist, and freelance engagements with online publications, financial advisors, and fintech companies.\nHis interest in personal finance dates back to joining his middle school stock trading club, where he learned about markets by doing simulated trading. A high school field trip to the New York Fed further cemented his fascination with the financial system and how seemingly academic concepts can make a big difference in the average person's life.\nHis personal interest in the environment has also carried over into finance, such as by covering ESG and impact investing. He believes that one of the top ways to solve the climate crisis is by helping both businesses and individuals realize the long-term financial benefits that sustainability can bring.\nIn his personal life, he also enjoys playing tennis, going to the gym, and going to the beach with his family — though often just for walks along a paved path, because vacuuming sand trekked in by a toddler and dog really cuts into writing time.\nExpertise\nJake’s areas of personal finance expertise include:\nInvesting\nBanking\nFinancial Planning\nRetirement\nInsurance\nEducation\nJake is a graduate of Boston University, where he wrote for The Daily Free Press and had a show on the school's radio station.\nRead more\nRead less\nTessa Campbell\nInvesting and Retirement Reporter\nTessa Campbell was an investing and retirement reporter on Business Insider’s personal finance desk. Over two years of personal finance reporting, Tessa built expertise on a range of financial topics, from the best credit cards to the best retirement savings accounts.\nExperience\nTessa reported on all things investing — deep-diving into complex financial topics, shedding light on lesser-known investment avenues, and uncovering ways readers can work the system to their advantage.\nAs a personal finance expert in her 20s, Tessa is acutely aware of the impacts time and uncertainty have on your investment decisions. While she curated Business Insider’s guide on the best investment apps, she believed that your financial portfolio does not have to be perfect, it just has to exist. A small investment is better than nothing, and the mistakes you make along the way are a necessary part of the learning process.\nExpertise: \nTessa’s expertise includes:\nCredit cards\nInvesting apps\nRetirement savings\nCryptocurrency\nThe stock market\nRetail investing\nEducation: \nTessa graduated from Susquehanna University with a creative writing degree and a psychology minor.\nWhen she’s not digging into a financial topic, you’ll find Tessa waist-deep in her second cup of coffee. She currently drinks Kitty Town coffee, which blends her love of coffee with her love for her two cats: Keekee and Dumpling. It was a targeted advertisement, and it worked.\nRead more\nRead less","attrs_markdown":"[Subscribe](https:\/\/www.businessinsider.com\/subscription)\n\n[Newsletters](https:\/\/www.businessinsider.com\/subscription\/newsletter)\n\nJump To Section\n\n[ETF definition](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-an-etf#etf-definition)\n\n[How ETFs work](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-an-etf#how-etfs-work)\n\n[ETFs vs. mutual funds vs. index funds](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-an-etf#etfs-vs.-mutual-funds-vs.-index-funds)\n\n[ETF benefits](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-an-etf#etf-benefits)\n\n[Risks of investing in ETFs](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-an-etf#risks-of-investing-in-etfs)\n\n[Types of ETFs](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-an-etf#types-of-etfs)\n\n[Real ETF examples](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-an-etf#real-etf-examples)\n\n[How to invest in ETFs](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-an-etf#how-to-invest-in-etfs)\n\n[Start 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partners](https:\/\/www.businessinsider.com\/personal-finance\/our-partners) for more details). However, our opinions are our own. See [how we rate investing products](https:\/\/www.businessinsider.com\/personal-finance\/investing\/investing-rating-methodology) to write unbiased product reviews.\n\n![Man invests in ETF funds on his mobile device outside.](https:\/\/i.insider.com\/66f194cace3009a0fac87ebc?width=700)\n\nETFs are among the most popular investment funds because they offer exposure to a variety of stocks or other assets.  Eva-Katalin\/Getty Images\n\n[ETF definition](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-an-etf#etf-definition)\n\n[How ETFs work](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-an-etf#how-etfs-work)\n\n[ETFs vs. mutual funds vs. index funds](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-an-etf#etfs-vs.-mutual-funds-vs.-index-funds)\n\n[ETF benefits](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-an-etf#etf-benefits)\n\n[Risks of investing in ETFs](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-an-etf#risks-of-investing-in-etfs)\n\n[Types of ETFs](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-an-etf#types-of-etfs)\n\n[Real ETF examples](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-an-etf#real-etf-examples)\n\n[How to invest in ETFs](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-an-etf#how-to-invest-in-etfs)\n\n[Start investing](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-an-etf#start-investing)\n\n[FAQs](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-an-etf#faqs)\n\nUpdated\n\n2025-04-25T15:41:49.587Z\n\nShare\n\nCopy link\n\n[Email](<mailto:?subject=Exchange traded funds (ETFs): A comprehensive guide to investing in ETFs&body=Exchange%20traded%20funds%20(ETFs)%3A%20A%20comprehensive%20guide%20to%20investing%20in%20ETFs%0D%0A%0D%0Ahttps%3A%2F%2Fwww.businessinsider.com%2Fpersonal-finance%2Finvesting%2Fwhat-is-an-etf&> \"Email\")\n\nFacebook\n\nWhatsApp\n\nX\n\nLinkedIn\n\nBluesky\n\nThreads\n\nAn icon in the shape of a lightning bolt.\n\nImpact Link\n\nSave Saved\n\n[Read in app](https:\/\/insider-app.onelink.me\/4cpG\/?af_js_web=true&af_ss_ver=2_3_0&af_dp=insider%3A%2F%2Fbi%2Fpost%2Fpersonal-finance%2Finvesting%2Fwhat-is-an-etf&af_force_deeplink=true&is_retargeting=true&deep_link_value=https%3A%2F%2Fwww.businessinsider.com%2Fpersonal-finance%2Finvesting%2Fwhat-is-an-etf&pid=businessinsider&c=post_page_share_bar_v2_smart_4.13.23 \"Download the app\")\n\n- An exchange-traded fund (ETF) represents a basket of securities that's traded on a stock exchange.\n- While many ETFs track indexes, some are actively managed.\n- ETFs have some advantages over mutual funds, but certain niche ETFs aren't always as liquid as some mutual funds.\n\nExchange-traded funds (ETFs) have become one of the most popular investment products offered by many of the [best investment apps](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-are-the-best-investment-apps). Investing in exchange-traded funds provides a low-cost and convenient way to diversify your portfolio, since you can gain access to a large pool of underlying assets within one investment.\n\nHowever, not all ETFs are the same. Some track broad stock market indexes, while others are sector-specific. And while they resemble mutual funds in many ways, there can be some pros and cons to choosing ETFs over other investments.\n\nSo, before investing in ETFs, you'll want to understand what these funds involve, including the costs and risks, along with ETF benefits.\n\n## ETF definition\nAn ETF represents a basket of securities that is traded on [stock market](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-the-stock-market) exchanges, much like any other stock. Technically, when you purchase a share of the ETF, you become a partial owner of the fund itself, but you're primarily gaining exposure to a wide range of underlying stocks or other assets, such as [bonds](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-a-bond) or [commodities](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-are-commodities). Your investment could increase or decrease in value as the prices of the underlying assets change.\n\nIn many ways, an ETF is like a [mutual fund](https:\/\/www.businessinsider.com\/personal-finance\/investing\/how-to-invest-in-mutual-funds), in that you're buying shares in an investment vehicle that uses investor capital to trade underlying securities, although the process differs a bit between them.\n\nFor the average investor, one of the main things to know is that because ETFs trade on stock exchanges, their pricing updates in real time, and you can trade them throughout the day. In contrast, mutual funds only update their pricing and can be traded once per day, after the market closes.\n\n\"Exchange-traded refers to the fund being able to be bought and sold during the trading day,\" says Curtis Bailey, a CFA, chief compliance officer and financial advisor at [Quiet Wealth Management](https:\/\/quietwealth.net\/). \"A fund is an ownership structure that allows an investor to own a portion of an underlying basket of securities.\"\n\n## How ETFs work\nETFs can be a little confusing when you dig deep into all the details, but for what the average investor experiences, they're usually easy to understand and trade.\n\n### Creation and structure of ETFs\nAn ETF is created when a financial institution registers with the [Securities and Exchange Commission](https:\/\/www.businessinsider.com\/personal-finance\/investing\/securities-and-exchange-commission)(SEC) to act as the fund sponsor\/ETF manager, who is responsible for creating and redeeming ETF shares and managing the fund overall.\n\nETF fund sponsors work with authorized participants (APs) — typically large broker-dealers — who buy the underlying securities that comprise the ETF. The AP then delivers those securities to the fund sponsor, who provides the AP with ETF shares that the AP then sells on the stock exchange.\n\nFrom there, the ETF shares can be bought and sold by any investor much like any other [stock](https:\/\/www.businessinsider.com\/personal-finance\/investing\/how-to-buy-stock). You can even typically purchase ETFs on [margin](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-margin-trading-how-it-works) and place [limit orders](https:\/\/www.businessinsider.com\/personal-finance\/investing\/stop-limit-order) like you can with stocks, though make sure you understand the risks involved with those approaches.\n\nAPs can also reverse the process by delivering ETF shares to the fund sponsor, who then retires those shares and delivers the underlying securities to the AP, such as if lots of ETF investors are selling their shares and the AP needs to bring the ETF price in line with the value of the underlying securities.\n\nThis creation\/redemption process isn't something that individual investors get involved with, nor is it necessarily something that they need to focus on. The main thing to know is that this interplay between the AP and ETF sponsor is what gives ETFs their intraday liquidity and enables the net asset value (NAV) — the price an ETF trades at — to accurately reflect what the underlying basket of securities is worth.\n\nAlso, this creation\/redemption process is the mechanism that allows ETFs to avoid triggering [capital gains taxes](https:\/\/www.businessinsider.com\/personal-finance\/taxes\/capital-gains-tax-rates) the way that mutual funds do.\n\nEssentially, mutual fund shareholders face capital gains based on the overall trading activity of the fund, because the mutual fund is actually buying and selling securities. In contrast, ETFs are not exactly buying and selling the underlying securities, but rather they're making exchanges with the AP, which means ETF shareholders aren't incurring taxes on the underlying security sales.\n\nSo, ETF shareholders only face capital gains based on their individual activity when buying and selling ETF shares. That can be particularly advantageous for those who want to hold ETFs long-term in a taxable account, as you can avoid capital gains during the years when you hold onto your assets.\n\n### Trading on exchanges\nAs the name implies, ETFs trade on exchanges — typically stock exchanges where you would find commonly traded stocks, like the New York Stock Exchange or NASDAQ. This helps make ETFs highly accessible. Most investors can simply open their [brokerage app](https:\/\/www.businessinsider.com\/personal-finance\/investing\/best-stock-trading-apps) and place a buy or sell order for an ETF, just as they can for most stocks.\n\nLike with stocks, you may have to pay a transaction fee to your brokerage for each ETF trade. That fee, however, is exclusive to the brokerage, rather than being something that the ETF collects. Instead, ETFs have a percentage-based annual fee, like mutual funds, known as an expense ratio, which the ETF sponsor charges for running the fund.\n\n\"The largest ETFs often have really low fees,\" says Bailey. \"\\[But\\] some ETFs have higher expense ratios than actively managed mutual funds.\"\n\nThe exchange price of an ETF typically reflects the underlying value of the securities the fund holds — for example, an ETF that tracks the S\\&P 500 will generally go up or down in unison (on a percentage basis, since the actual share price differs depending on the fund) with how those 500 companies in the S\\&P 500 perform.\n\nHowever, it's important to note that tracking errors or tracking differences — such as if the ETF holds slightly different securities than the benchmark index — could lead to a small discrepancy between the ETF's price and the value of the underlying assets in some cases, such as during periods of unusually high or low demand for an ETF.\n\n### ETF tracking error\/tracking difference\nAs mentioned, ETFs don't always perfectly follow the pricing of their underlying securities. Tracking difference is the gap between the return of an investment\/investment portfolio and the return of a chosen benchmark that the investment\/portfolio is meant to follow. While this is often called tracking error, technically a tracking error is the representation of tracking difference as an annualized standard deviation percentage. For example, an ETF with a 0.1% tracking error typically varies 0.1% above or below the benchmark over the course of a year, though it's still possible to fall outside this standard range.\n\nA related phenomenon is how there can be a difference between the price people are willing to buy and sell shares of the ETF. The bid\/ask spread — which is the difference between the offer\/sell (ask) price and the purchase\/buy (bid) price of a security — can essentially affect your individual tracking difference. With a wide bid\/ask spread, such as on some less commonly traded ETFs, you might pay more than the market price in order to acquire those shares.\n\n\"This spread may represent an additional hidden cost as an investor pays more to buy the shares and receives less to sell the shares,\" says Bailey.\n\n## ETFs vs. mutual funds vs. index funds\nETFs, mutual funds, and index funds share some similarities, but they are not interchangeable terms.\n\nAs mentioned, an ETF is a fund that trades on an exchange and represents ownership of a pool of securities. ETFs have real-time pricing based on trading activity\/underlying security prices, and they can be bought and sold throughout the trading day when the stock market is open (and sometimes after hours, depending on the brokerage).\n\nMutual funds also hold a basket of securities. However, unlike ETFs, mutual funds are not traded on stock exchanges. Instead, a broker typically facilitates buy and sell orders between investors and the mutual fund company, or you might transact directly with the mutual fund company. As part of not being exchange-traded, mutual funds are only priced once per day after the market closes, based on the underlying security prices.\n\nMutual funds often have higher initial minimum investment requirements and fees than ETFs, though it depends on the specific funds. However, mutual funds can hold advantages over ETFs, like sometimes being easier for buying fractional shares.\n\nSome ETFs, particularly ones with niche themes, might also be less [liquid](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-liquidity) than some mutual funds. Although mutual funds don't have intraday liquidity, they arguably provide greater overall liquidity in the sense that the fund manager acts as a guaranteed trade partner and there's no bid\/ask spread — the fund manager simply offers the price at which it will accept buy or sell orders. There are other important differences between [mutual funds and ETFs](https:\/\/www.businessinsider.com\/personal-finance\/investing\/etf-vs-mutual-fund) for investors to consider as well, but the specifics vary based on the funds you're comparing.\n\nAn [index fund](https:\/\/www.businessinsider.com\/personal-finance\/investing\/how-to-invest-in-index-funds) is a general term for a fund that tracks an index. Both ETFs and mutual funds could be index funds. A common simplification is that ETFs tend to track index funds while mutual funds are often actively managed, but you should not assume that's always the case. Look at the specific details for any fund you're considering.\n\n\"It's important to understand the fund's underlying investments, strategy, and costs,\" says Bailey.\n\n## ETF benefits\nInvesting in ETFs provides several potential benefits, sometimes even above what individual stocks or mutual funds provide. The exact benefits depend on which ETF you're considering and what the alternatives are, but in general, some of the top pros of ETFs include the following:\n\n### Diversification\nETFs offer [diversification](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-diversification) by providing exposure to a basket of assets. So while you might just be buying one ETF, your investment is generally more diversified than investing in the stock of one individual company. That said, the level of diversification varies depending on the type of ETF.\n\n### Liquidity\nETFs tend to be highly liquid in the sense that you can typically buy and sell ETF shares as you wish throughout the trading day. Even if the underlying assets aren't very liquid, like if an ETF holds some private investments, the structure of the fund could provide some additional liquidity.\n\nMutual funds are generally liquid, too, though it depends on the specific fund and how you look at liquidity. Some investors prefer the intraday [liquidity](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-liquidity) of an ETF, while others prefer how mutual funds have no bid\/ask spread, for example, as the fund manager always acts as a clear buyer or seller.\n\n### Low costs\nETFs tend to have lower expense ratios and lower investment minimums than mutual funds, though it depends on the type of fund. If you can find a brokerage that has low or no transaction fees, that can also help keep ETF costs down. That said, individual stocks do not have fund management fees like ETFs or mutual funds do.\n\n### Tax efficiency\nConnected to low costs, ETFs tend to be more tax-efficient than mutual funds. That's because the structure of ETFs enables the creation and redemption of shares by APs to not trigger capital gains, whereas the activities of other investors in a mutual fund affect the overall fund's taxes. The best way to think about the difference is that ETFs are only taxed based on when you sell your shares or receive dividends, while mutual funds are also taxed based on the capital gains of the fund overall, even if you hold onto your shares.\n\n### Transparency\nETFs may seem complex at times, but they are transparent in the sense that expense ratios are clearly disclosed, and they typically disclose holdings on a daily basis, so you can understand what you're investing in. This is similar to the transparency of mutual funds, although mutual funds usually disclose holdings only on a monthly or quarterly basis; yet both are more transparent than some other vehicles like hedge funds.\n\n## Risks of investing in ETFs\nWhile ETFs offer several benefits, there are also several risks to watch out for, such as:\n\n### Market risk\nLike with any tradable asset, the value of ETFs can fluctuate based on what's happening with the overall market. You might invest in a well-managed ETF, but if investors are selling the declining stocks of the companies that the ETF invests in, then the ETF will generally follow suit in losing value.\n\nAlso, some more exotic ETFs use leverage or short stocks (or gain short exposure through assets like derivatives), which can amplify losses more than if you invested directly in the underlying stocks.\n\n### Tracking error\/tracking difference\nBecause ETFs are tradable securities, the price might not always reflect the underlying assets or the benchmark it tracks. It's possible, for example, that high demand for an ETF temporarily drives up the price above what the underlying securities are worth, which could cause the overall returns to slightly lag the benchmark.\n\n### Liquidity risk\nWhile the liquidity of ETFs is generally seen as a positive, there are also some risks to consider. For one, less popular ETFs might not have much trading activity, so the bid\/ask spreads could be wide, causing investors to essentially incur higher trading costs that affect net returns. Also, some argue that the intraday liquidity of ETFs makes them susceptible to overtrading, whereas you might feel more capable of taking a set-it-and-forget-it approach with mutual funds.\n\n## Types of ETFs\nOne way of categorizing ETFs is by management style. In that sense, there are two main types of ETFs: index-based ETFs and actively managed ETFs. Index-based ETFs are [passively managed investments](https:\/\/www.businessinsider.com\/personal-finance\/investing\/passive-vs-active-investing) and track an index — a grouping of individual assets that share a common feature. For example, the [S\\&P 500](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-the-sp-500) is an index of the stocks of the 500 largest public companies in the US. Most ETFs are passively managed.\n\nThen there are actively managed ETFs, which generally aren't passively following an index. Instead, they often have a benchmark index and a fund manager or team tries to outperform the benchmark by trading assets a little differently than what the index does.\n\nOne actively managed ETF example might be a fund that includes only certain companies within the S\\&P 500, rather than the whole index. Or, the fund manager might frequently buy and sell the stocks of S\\&P 500 companies to try to capture an edge, rather than just holding these assets. Generally, you'll pay higher fees for an actively managed ETF.\n\nThat said, it's possible for an ETF to combine elements of passive and active, such as if a fund follows a custom index.\n\nWhether an ETF is passive or active, there can also be some different types of ETFs, such as the following:\n\n### Stock ETFs\nStock or equity ETFs often track a specific index of stocks. The index may be based on the companies' size, region, industry, or other commonalities. That said, a stock\/equity ETF could be actively managed based on the stocks the fund manager thinks will perform well.\n\n### Bond ETFs\nBond or fixed-income ETFs track a portfolio of bonds or similar fixed-income assets, such as corporate and government debt.\n\n### Commodity ETFs\nCommodity ETFs track the price of raw materials, such as gold or oil, perhaps by using futures contracts or holding physical assets.\n\n### International ETFs\nInternational ETFs track companies from a specific country or region. These are often types of equity ETFs, but a bond ETF could also represent a basket of international fixed-income securities.\n\n### Specialty ETFs\nThere are many types of niche or specialty ETFs, such as those that track certain industries or follow investment themes like allocating to [ESG investing](https:\/\/www.businessinsider.com\/personal-finance\/investing\/esg-investing) in socially conscious companies. There are now even ETFs that track [cryptocurrency](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-cryptocurrency).\n\n## Real ETF examples\nWith the different types of ETFs in mind, here are some real ETF examples:\n\n- [**SPDR S\\&P 500 ETF Trust (SPY)**](https:\/\/markets.businessinsider.com\/etfs\/spdr-sp-500-etf-trust-us78462f1030) is one of the first and most popular equity ETFs. It tracks the S\\&P 500.\n- [**Invesco QQQ Trust (QQQ)**](https:\/\/markets.businessinsider.com\/etfs\/invesco-qqq-trust-us46090e1038) is another popular equity ETF. It tracks the Nasdaq-100 Index, which is made up of the largest non-financial companies on the [Nasdaq stock exchange](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-nasdaq).\n- [**Vanguard Total International Stock Index Fund ETF Shares (VXUS)**](https:\/\/markets.businessinsider.com\/etfs\/vanguard-total-international-stock-index-fund-etf-shares-us9219097683) is an international equity ETF that tracks the FTSE Global All Cap ex US Index, an index representing a broad range of public companies outside the U.S.\n- [**iShares Global Clean Energy ETF (ICLN)**](https:\/\/markets.businessinsider.com\/etfs\/ishares-global-clean-energy-etf-us4642882249) is a sector and thematic ETF that tracks the S\\&P Global Clean Energy Index.\n- [**ARK Innovation ETF (ARKK)**](https:\/\/markets.businessinsider.com\/etfs\/ark-innovation-etf-us00214q1040) is a large, actively managed ETF that primarily invests in companies that create and use innovative technology.\n## How to invest in ETFs\nInvesting in ETFs is typically easy. You can buy and sell ETFs through a brokerage account by simply placing a buy or sell order, just as you would for other stocks.\n\nThe exact ETFs available can differ by brokerage, but most online brokerage accounts\/investing platforms offer ETFs in some capacity. But not all investing apps and brokerages do, so make sure to do your research before signing up.\n\nBeginners may have the best luck accessing ETFs with one of the [best robo-advisors](https:\/\/www.businessinsider.com\/personal-finance\/investing\/best-robo-advisors) or the [best investment apps for beginners](https:\/\/www.businessinsider.com\/personal-finance\/investing\/best-investment-apps-for-beginners). These platforms might serve as a good ETF guide by recommending certain ETFs to you, based on factors like your risk tolerance and investment style. But if you're a more hands-on investor, you can use online screeners and your brokerage's trading function to find ETFs that fit your investment goals.\n\n\"Every investor should consider ETFs,\" says Bailey. \"They are typically more tax-efficient and lower cost than mutual funds and offer diversification that would be hard to mimic through individual positions.\"\n\nHowever, complex and high-risk ETFs are also available. Before making an investment decision, consider how the particular ETF could impact your portfolio and how it compares to other types of funds.\n\n## Start investing\n## FAQs about ETFs\n### What's the difference between ETFs and mutual funds?\nIt indicates an expandable section or menu, or sometimes previous \/ next navigation options.\n\nThe main difference between ETFs and mutual funds is that an ETF trades on a stock exchange, while a mutual fund only trades via a broker. As such, there are differences, such as ETFs having intraday liquidity. ETFs also often have tax advantages and lower costs.\n\n### Are ETFs suitable for long-term investing?\nIt indicates an expandable section or menu, or sometimes previous \/ next navigation options.\n\nFor many investors, ETFs are suitable for long-term, low-cost investing, but it depends on the specific ETF and the investor. A common long-term approach with ETFs is to buy and hold a low-cost ETF that tracks a diversified index like the S\\&P 500.\n\n### Is an ETF better than a stock?\nIt indicates an expandable section or menu, or sometimes previous \/ next navigation options.\n\nAn ETF might be better than an individual stock in terms of gaining quick diversification to a broad array of holdings, but the risk\/reward can vary, depending on the type of ETF and stock.\n\n### Do ETFs pay dividends?\nIt indicates an expandable section or menu, or sometimes previous \/ next navigation options.\n\nYes, many ETFs pay dividends, based on the underlying holdings, such as fixed-income securities or dividend-paying stocks. However, dividend rates vary significantly by fund.\n\n### What are the downsides to ETFs?\nIt indicates an expandable section or menu, or sometimes previous \/ next navigation options.\n\nThe downsides to ETFs depend on the context, but some common negatives include the risk of investment losses, tracking error\/tracking difference vs. an index, higher fees than investing directly in stocks (but lower than many mutual funds), and sometimes limited liquidity, which can widen bid\/ask spreads. ETFs also might have downsides vs. mutual funds, such as not always enabling fractional investing.\n\n[![Jake Safane](<data:image\/svg+xml,%3Csvg xmlns='http:\/\/www.w3.org\/2000\/svg' viewBox='0 0 1 1'%3E%3C\/svg%3E>) ![](https:\/\/i.insider.com\/652eb00f211def8ed8373e18?crop=1:1&width=256&format=jpeg&auto=webp)](https:\/\/www.businessinsider.com\/author\/jake-safane)\n\n[Jake Safane](https:\/\/www.businessinsider.com\/author\/jake-safane)\n\nJake Safane is a freelance writer specializing in finance and sustainability. He runs a corporate sustainability blog, [Carbon Neutral Copy](https:\/\/carbonneutralcopy.com\/), and his work has appeared in publications such as The Economist, CBS MoneyWatch, and the Los Angeles Times.ExperienceJake has been working in financial journalism since 2011, covering areas such as banking and investing for both businesses and individuals. His career has included a mix of in-house reporting jobs at B2B finance publications such as Global Custodian and FundFire, a role in sponsored research at The Economist, and freelance engagements with online publications, financial advisors, and fintech companies.His interest in personal finance dates back to joining his middle school stock trading club, where he learned about markets by doing simulated trading. A high school field trip to the New York Fed further cemented his fascination with the financial system and how seemingly academic concepts can make a big difference in the average person's life.His personal interest in the environment has also carried over into finance, such as by covering ESG and impact investing. He believes that one of the top ways to solve the climate crisis is by helping both businesses and individuals realize the long-term financial benefits that sustainability can bring.In his personal life, he also enjoys playing tennis, going to the gym, and going to the beach with his family — though often just for walks along a paved path, because vacuuming sand trekked in by a toddler and dog really cuts into writing time.ExpertiseJake’s areas of personal finance expertise include:\n\n- Investing\n- Banking\n- Financial Planning\n- Retirement\n- Insurance\n\nEducationJake is a graduate of Boston University, where he wrote for The Daily Free Press and had a show on the school's radio station.\n\nRead more\n\nRead less\n\n[![Tessa Campbell](<data:image\/svg+xml,%3Csvg xmlns='http:\/\/www.w3.org\/2000\/svg' viewBox='0 0 1 1'%3E%3C\/svg%3E>) ![](https:\/\/i.insider.com\/6494561e65b9ce0018a46b81?crop=1:1&width=256&format=jpeg&auto=webp)](https:\/\/www.businessinsider.com\/author\/tessa-campbell)\n\n[Tessa Campbell](https:\/\/www.businessinsider.com\/author\/tessa-campbell)\n\nInvesting and Retirement Reporter\n\nTessa Campbell was an investing and retirement reporter on Business Insider’s personal finance desk. Over two years of personal finance reporting, Tessa built expertise on a range of financial topics, from the best credit cards to the best retirement savings accounts.ExperienceTessa reported on all things investing — deep-diving into complex financial topics, shedding light on lesser-known investment avenues, and uncovering ways readers can work the system to their advantage.As a personal finance expert in her 20s, Tessa is acutely aware of the impacts time and uncertainty have on your investment decisions. While she curated Business Insider’s guide on the best investment apps, she believed that your financial portfolio does not have to be perfect, it just has to exist. A small investment is better than nothing, and the mistakes you make along the way are a necessary part of the learning process.Expertise: Tessa’s expertise includes:\n\n- Credit cards\n- Investing apps\n- Retirement savings\n- Cryptocurrency\n- The stock market\n- Retail investing\n\nEducation: Tessa graduated from Susquehanna University with a creative writing degree and a psychology minor.When she’s not digging into a financial topic, you’ll find Tessa waist-deep in her second cup of coffee. She currently drinks Kitty Town coffee, which blends her love of coffee with her love for her two cats: Keekee and Dumpling. It was a targeted advertisement, and it worked.\n\nRead more\n\nRead less\n\nA white circle with a black border surrounding a chevron pointing up. 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[Main content](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-an-etf#post-headline)\n2. [Search](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-an-etf#search)\n3. [Account](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-an-etf#account)\n4. [Jump to top of page](https:\/\/www.businessinsider.com\/)","attrs_readable_markdown":"Updated 2025-04-25T15:41:49.587Z\n\n- An exchange-traded fund (ETF) represents a basket of securities that's traded on a stock exchange.\n- While many ETFs track indexes, some are actively managed.\n- ETFs have some advantages over mutual funds, but certain niche ETFs aren't always as liquid as some mutual funds.\n\nExchange-traded funds (ETFs) have become one of the most popular investment products offered by many of the [best investment apps](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-are-the-best-investment-apps). Investing in exchange-traded funds provides a low-cost and convenient way to diversify your portfolio, since you can gain access to a large pool of underlying assets within one investment.\n\nHowever, not all ETFs are the same. Some track broad stock market indexes, while others are sector-specific. And while they resemble mutual funds in many ways, there can be some pros and cons to choosing ETFs over other investments.\n\nSo, before investing in ETFs, you'll want to understand what these funds involve, including the costs and risks, along with ETF benefits.\n\n## ETF definition\nAn ETF represents a basket of securities that is traded on [stock market](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-the-stock-market) exchanges, much like any other stock. Technically, when you purchase a share of the ETF, you become a partial owner of the fund itself, but you're primarily gaining exposure to a wide range of underlying stocks or other assets, such as [bonds](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-a-bond) or [commodities](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-are-commodities). Your investment could increase or decrease in value as the prices of the underlying assets change.\n\nIn many ways, an ETF is like a [mutual fund](https:\/\/www.businessinsider.com\/personal-finance\/investing\/how-to-invest-in-mutual-funds), in that you're buying shares in an investment vehicle that uses investor capital to trade underlying securities, although the process differs a bit between them.\n\nFor the average investor, one of the main things to know is that because ETFs trade on stock exchanges, their pricing updates in real time, and you can trade them throughout the day. In contrast, mutual funds only update their pricing and can be traded once per day, after the market closes.\n\n\"Exchange-traded refers to the fund being able to be bought and sold during the trading day,\" says Curtis Bailey, a CFA, chief compliance officer and financial advisor at [Quiet Wealth Management](https:\/\/quietwealth.net\/). \"A fund is an ownership structure that allows an investor to own a portion of an underlying basket of securities.\"\n\n## How ETFs work\nETFs can be a little confusing when you dig deep into all the details, but for what the average investor experiences, they're usually easy to understand and trade.\n\n### Creation and structure of ETFs\nAn ETF is created when a financial institution registers with the [Securities and Exchange Commission](https:\/\/www.businessinsider.com\/personal-finance\/investing\/securities-and-exchange-commission)(SEC) to act as the fund sponsor\/ETF manager, who is responsible for creating and redeeming ETF shares and managing the fund overall.\n\nETF fund sponsors work with authorized participants (APs) — typically large broker-dealers — who buy the underlying securities that comprise the ETF. The AP then delivers those securities to the fund sponsor, who provides the AP with ETF shares that the AP then sells on the stock exchange.\n\nFrom there, the ETF shares can be bought and sold by any investor much like any other [stock](https:\/\/www.businessinsider.com\/personal-finance\/investing\/how-to-buy-stock). You can even typically purchase ETFs on [margin](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-margin-trading-how-it-works) and place [limit orders](https:\/\/www.businessinsider.com\/personal-finance\/investing\/stop-limit-order) like you can with stocks, though make sure you understand the risks involved with those approaches.\n\nAPs can also reverse the process by delivering ETF shares to the fund sponsor, who then retires those shares and delivers the underlying securities to the AP, such as if lots of ETF investors are selling their shares and the AP needs to bring the ETF price in line with the value of the underlying securities.\n\nThis creation\/redemption process isn't something that individual investors get involved with, nor is it necessarily something that they need to focus on. The main thing to know is that this interplay between the AP and ETF sponsor is what gives ETFs their intraday liquidity and enables the net asset value (NAV) — the price an ETF trades at — to accurately reflect what the underlying basket of securities is worth.\n\nAlso, this creation\/redemption process is the mechanism that allows ETFs to avoid triggering [capital gains taxes](https:\/\/www.businessinsider.com\/personal-finance\/taxes\/capital-gains-tax-rates) the way that mutual funds do.\n\nEssentially, mutual fund shareholders face capital gains based on the overall trading activity of the fund, because the mutual fund is actually buying and selling securities. In contrast, ETFs are not exactly buying and selling the underlying securities, but rather they're making exchanges with the AP, which means ETF shareholders aren't incurring taxes on the underlying security sales.\n\nSo, ETF shareholders only face capital gains based on their individual activity when buying and selling ETF shares. That can be particularly advantageous for those who want to hold ETFs long-term in a taxable account, as you can avoid capital gains during the years when you hold onto your assets.\n\n### Trading on exchanges\nAs the name implies, ETFs trade on exchanges — typically stock exchanges where you would find commonly traded stocks, like the New York Stock Exchange or NASDAQ. This helps make ETFs highly accessible. Most investors can simply open their [brokerage app](https:\/\/www.businessinsider.com\/personal-finance\/investing\/best-stock-trading-apps) and place a buy or sell order for an ETF, just as they can for most stocks.\n\nLike with stocks, you may have to pay a transaction fee to your brokerage for each ETF trade. That fee, however, is exclusive to the brokerage, rather than being something that the ETF collects. Instead, ETFs have a percentage-based annual fee, like mutual funds, known as an expense ratio, which the ETF sponsor charges for running the fund.\n\n\"The largest ETFs often have really low fees,\" says Bailey. \"\\[But\\] some ETFs have higher expense ratios than actively managed mutual funds.\"\n\nThe exchange price of an ETF typically reflects the underlying value of the securities the fund holds — for example, an ETF that tracks the S\\&P 500 will generally go up or down in unison (on a percentage basis, since the actual share price differs depending on the fund) with how those 500 companies in the S\\&P 500 perform.\n\nHowever, it's important to note that tracking errors or tracking differences — such as if the ETF holds slightly different securities than the benchmark index — could lead to a small discrepancy between the ETF's price and the value of the underlying assets in some cases, such as during periods of unusually high or low demand for an ETF.\n\n### ETF tracking error\/tracking difference\nAs mentioned, ETFs don't always perfectly follow the pricing of their underlying securities. Tracking difference is the gap between the return of an investment\/investment portfolio and the return of a chosen benchmark that the investment\/portfolio is meant to follow. While this is often called tracking error, technically a tracking error is the representation of tracking difference as an annualized standard deviation percentage. For example, an ETF with a 0.1% tracking error typically varies 0.1% above or below the benchmark over the course of a year, though it's still possible to fall outside this standard range.\n\nA related phenomenon is how there can be a difference between the price people are willing to buy and sell shares of the ETF. The bid\/ask spread — which is the difference between the offer\/sell (ask) price and the purchase\/buy (bid) price of a security — can essentially affect your individual tracking difference. With a wide bid\/ask spread, such as on some less commonly traded ETFs, you might pay more than the market price in order to acquire those shares.\n\n\"This spread may represent an additional hidden cost as an investor pays more to buy the shares and receives less to sell the shares,\" says Bailey.\n\n## ETFs vs. mutual funds vs. index funds\nETFs, mutual funds, and index funds share some similarities, but they are not interchangeable terms.\n\nAs mentioned, an ETF is a fund that trades on an exchange and represents ownership of a pool of securities. ETFs have real-time pricing based on trading activity\/underlying security prices, and they can be bought and sold throughout the trading day when the stock market is open (and sometimes after hours, depending on the brokerage).\n\nMutual funds also hold a basket of securities. However, unlike ETFs, mutual funds are not traded on stock exchanges. Instead, a broker typically facilitates buy and sell orders between investors and the mutual fund company, or you might transact directly with the mutual fund company. As part of not being exchange-traded, mutual funds are only priced once per day after the market closes, based on the underlying security prices.\n\nMutual funds often have higher initial minimum investment requirements and fees than ETFs, though it depends on the specific funds. However, mutual funds can hold advantages over ETFs, like sometimes being easier for buying fractional shares.\n\nSome ETFs, particularly ones with niche themes, might also be less [liquid](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-liquidity) than some mutual funds. Although mutual funds don't have intraday liquidity, they arguably provide greater overall liquidity in the sense that the fund manager acts as a guaranteed trade partner and there's no bid\/ask spread — the fund manager simply offers the price at which it will accept buy or sell orders. There are other important differences between [mutual funds and ETFs](https:\/\/www.businessinsider.com\/personal-finance\/investing\/etf-vs-mutual-fund) for investors to consider as well, but the specifics vary based on the funds you're comparing.\n\nAn [index fund](https:\/\/www.businessinsider.com\/personal-finance\/investing\/how-to-invest-in-index-funds) is a general term for a fund that tracks an index. Both ETFs and mutual funds could be index funds. A common simplification is that ETFs tend to track index funds while mutual funds are often actively managed, but you should not assume that's always the case. Look at the specific details for any fund you're considering.\n\n\"It's important to understand the fund's underlying investments, strategy, and costs,\" says Bailey.\n\n## ETF benefits\nInvesting in ETFs provides several potential benefits, sometimes even above what individual stocks or mutual funds provide. The exact benefits depend on which ETF you're considering and what the alternatives are, but in general, some of the top pros of ETFs include the following:\n\n### Diversification\nETFs offer [diversification](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-diversification) by providing exposure to a basket of assets. So while you might just be buying one ETF, your investment is generally more diversified than investing in the stock of one individual company. That said, the level of diversification varies depending on the type of ETF.\n\n### Liquidity\nETFs tend to be highly liquid in the sense that you can typically buy and sell ETF shares as you wish throughout the trading day. Even if the underlying assets aren't very liquid, like if an ETF holds some private investments, the structure of the fund could provide some additional liquidity.\n\nMutual funds are generally liquid, too, though it depends on the specific fund and how you look at liquidity. Some investors prefer the intraday [liquidity](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-liquidity) of an ETF, while others prefer how mutual funds have no bid\/ask spread, for example, as the fund manager always acts as a clear buyer or seller.\n\n### Low costs\nETFs tend to have lower expense ratios and lower investment minimums than mutual funds, though it depends on the type of fund. If you can find a brokerage that has low or no transaction fees, that can also help keep ETF costs down. That said, individual stocks do not have fund management fees like ETFs or mutual funds do.\n\n### Tax efficiency\nConnected to low costs, ETFs tend to be more tax-efficient than mutual funds. That's because the structure of ETFs enables the creation and redemption of shares by APs to not trigger capital gains, whereas the activities of other investors in a mutual fund affect the overall fund's taxes. The best way to think about the difference is that ETFs are only taxed based on when you sell your shares or receive dividends, while mutual funds are also taxed based on the capital gains of the fund overall, even if you hold onto your shares.\n\n### Transparency\nETFs may seem complex at times, but they are transparent in the sense that expense ratios are clearly disclosed, and they typically disclose holdings on a daily basis, so you can understand what you're investing in. This is similar to the transparency of mutual funds, although mutual funds usually disclose holdings only on a monthly or quarterly basis; yet both are more transparent than some other vehicles like hedge funds.\n\n## Risks of investing in ETFs\nWhile ETFs offer several benefits, there are also several risks to watch out for, such as:\n\n### Market risk\nLike with any tradable asset, the value of ETFs can fluctuate based on what's happening with the overall market. You might invest in a well-managed ETF, but if investors are selling the declining stocks of the companies that the ETF invests in, then the ETF will generally follow suit in losing value.\n\nAlso, some more exotic ETFs use leverage or short stocks (or gain short exposure through assets like derivatives), which can amplify losses more than if you invested directly in the underlying stocks.\n\n### Tracking error\/tracking difference\nBecause ETFs are tradable securities, the price might not always reflect the underlying assets or the benchmark it tracks. It's possible, for example, that high demand for an ETF temporarily drives up the price above what the underlying securities are worth, which could cause the overall returns to slightly lag the benchmark.\n\n### Liquidity risk\nWhile the liquidity of ETFs is generally seen as a positive, there are also some risks to consider. For one, less popular ETFs might not have much trading activity, so the bid\/ask spreads could be wide, causing investors to essentially incur higher trading costs that affect net returns. Also, some argue that the intraday liquidity of ETFs makes them susceptible to overtrading, whereas you might feel more capable of taking a set-it-and-forget-it approach with mutual funds.\n\n## Types of ETFs\nOne way of categorizing ETFs is by management style. In that sense, there are two main types of ETFs: index-based ETFs and actively managed ETFs. Index-based ETFs are [passively managed investments](https:\/\/www.businessinsider.com\/personal-finance\/investing\/passive-vs-active-investing) and track an index — a grouping of individual assets that share a common feature. For example, the [S\\&P 500](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-the-sp-500) is an index of the stocks of the 500 largest public companies in the US. Most ETFs are passively managed.\n\nThen there are actively managed ETFs, which generally aren't passively following an index. Instead, they often have a benchmark index and a fund manager or team tries to outperform the benchmark by trading assets a little differently than what the index does.\n\nOne actively managed ETF example might be a fund that includes only certain companies within the S\\&P 500, rather than the whole index. Or, the fund manager might frequently buy and sell the stocks of S\\&P 500 companies to try to capture an edge, rather than just holding these assets. Generally, you'll pay higher fees for an actively managed ETF.\n\nThat said, it's possible for an ETF to combine elements of passive and active, such as if a fund follows a custom index.\n\nWhether an ETF is passive or active, there can also be some different types of ETFs, such as the following:\n\n### Stock ETFs\nStock or equity ETFs often track a specific index of stocks. The index may be based on the companies' size, region, industry, or other commonalities. That said, a stock\/equity ETF could be actively managed based on the stocks the fund manager thinks will perform well.\n\n### Bond ETFs\nBond or fixed-income ETFs track a portfolio of bonds or similar fixed-income assets, such as corporate and government debt.\n\n### Commodity ETFs\nCommodity ETFs track the price of raw materials, such as gold or oil, perhaps by using futures contracts or holding physical assets.\n\n### International ETFs\nInternational ETFs track companies from a specific country or region. These are often types of equity ETFs, but a bond ETF could also represent a basket of international fixed-income securities.\n\n### Specialty ETFs\nThere are many types of niche or specialty ETFs, such as those that track certain industries or follow investment themes like allocating to [ESG investing](https:\/\/www.businessinsider.com\/personal-finance\/investing\/esg-investing) in socially conscious companies. There are now even ETFs that track [cryptocurrency](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-cryptocurrency).\n\n## Real ETF examples\nWith the different types of ETFs in mind, here are some real ETF examples:\n\n- [**SPDR S\\&P 500 ETF Trust (SPY)**](https:\/\/markets.businessinsider.com\/etfs\/spdr-sp-500-etf-trust-us78462f1030) is one of the first and most popular equity ETFs. It tracks the S\\&P 500.\n- [**Invesco QQQ Trust (QQQ)**](https:\/\/markets.businessinsider.com\/etfs\/invesco-qqq-trust-us46090e1038) is another popular equity ETF. It tracks the Nasdaq-100 Index, which is made up of the largest non-financial companies on the [Nasdaq stock exchange](https:\/\/www.businessinsider.com\/personal-finance\/investing\/what-is-nasdaq).\n- [**Vanguard Total International Stock Index Fund ETF Shares (VXUS)**](https:\/\/markets.businessinsider.com\/etfs\/vanguard-total-international-stock-index-fund-etf-shares-us9219097683) is an international equity ETF that tracks the FTSE Global All Cap ex US Index, an index representing a broad range of public companies outside the U.S.\n- [**iShares Global Clean Energy ETF (ICLN)**](https:\/\/markets.businessinsider.com\/etfs\/ishares-global-clean-energy-etf-us4642882249) is a sector and thematic ETF that tracks the S\\&P Global Clean Energy Index.\n- [**ARK Innovation ETF (ARKK)**](https:\/\/markets.businessinsider.com\/etfs\/ark-innovation-etf-us00214q1040) is a large, actively managed ETF that primarily invests in companies that create and use innovative technology.\n## How to invest in ETFs\nInvesting in ETFs is typically easy. You can buy and sell ETFs through a brokerage account by simply placing a buy or sell order, just as you would for other stocks.\n\nThe exact ETFs available can differ by brokerage, but most online brokerage accounts\/investing platforms offer ETFs in some capacity. But not all investing apps and brokerages do, so make sure to do your research before signing up.\n\nBeginners may have the best luck accessing ETFs with one of the [best robo-advisors](https:\/\/www.businessinsider.com\/personal-finance\/investing\/best-robo-advisors) or the [best investment apps for beginners](https:\/\/www.businessinsider.com\/personal-finance\/investing\/best-investment-apps-for-beginners). These platforms might serve as a good ETF guide by recommending certain ETFs to you, based on factors like your risk tolerance and investment style. But if you're a more hands-on investor, you can use online screeners and your brokerage's trading function to find ETFs that fit your investment goals.\n\n\"Every investor should consider ETFs,\" says Bailey. \"They are typically more tax-efficient and lower cost than mutual funds and offer diversification that would be hard to mimic through individual positions.\"\n\nHowever, complex and high-risk ETFs are also available. Before making an investment decision, consider how the particular ETF could impact your portfolio and how it compares to other types of funds.\n\n## Start investing\n## FAQs about ETFs\nThe main difference between ETFs and mutual funds is that an ETF trades on a stock exchange, while a mutual fund only trades via a broker. As such, there are differences, such as ETFs having intraday liquidity. ETFs also often have tax advantages and lower costs.\n\nFor many investors, ETFs are suitable for long-term, low-cost investing, but it depends on the specific ETF and the investor. A common long-term approach with ETFs is to buy and hold a low-cost ETF that tracks a diversified index like the S\\&P 500.\n\nAn ETF might be better than an individual stock in terms of gaining quick diversification to a broad array of holdings, but the risk\/reward can vary, depending on the type of ETF and stock.\n\nYes, many ETFs pay dividends, based on the underlying holdings, such as fixed-income securities or dividend-paying stocks. However, dividend rates vary significantly by fund.\n\nThe downsides to ETFs depend on the context, but some common negatives include the risk of investment losses, tracking error\/tracking difference vs. an index, higher fees than investing directly in stocks (but lower than many mutual funds), and sometimes limited liquidity, which can widen bid\/ask spreads. ETFs also might have downsides vs. mutual funds, such as not always enabling fractional investing.\n\n[![](https:\/\/i.insider.com\/652eb00f211def8ed8373e18?crop=1:1&width=256&format=jpeg&auto=webp)](https:\/\/www.businessinsider.com\/author\/jake-safane)\n\nJake Safane is a freelance writer specializing in finance and sustainability. He runs a corporate sustainability blog, [Carbon Neutral Copy](https:\/\/carbonneutralcopy.com\/), and his work has appeared in publications such as The Economist, CBS MoneyWatch, and the Los Angeles Times.ExperienceJake has been working in financial journalism since 2011, covering areas such as banking and investing for both businesses and individuals. His career has included a mix of in-house reporting jobs at B2B finance publications such as Global Custodian and FundFire, a role in sponsored research at The Economist, and freelance engagements with online publications, financial advisors, and fintech companies.His interest in personal finance dates back to joining his middle school stock trading club, where he learned about markets by doing simulated trading. A high school field trip to the New York Fed further cemented his fascination with the financial system and how seemingly academic concepts can make a big difference in the average person's life.His personal interest in the environment has also carried over into finance, such as by covering ESG and impact investing. He believes that one of the top ways to solve the climate crisis is by helping both businesses and individuals realize the long-term financial benefits that sustainability can bring.In his personal life, he also enjoys playing tennis, going to the gym, and going to the beach with his family — though often just for walks along a paved path, because vacuuming sand trekked in by a toddler and dog really cuts into writing time.ExpertiseJake’s areas of personal finance expertise include:\n\n- Investing\n- Banking\n- Financial Planning\n- Retirement\n- Insurance\n\nEducationJake is a graduate of Boston University, where he wrote for The Daily Free Press and had a show on the school's radio station.\n\nRead more Read less\n\n[![](https:\/\/i.insider.com\/6494561e65b9ce0018a46b81?crop=1:1&width=256&format=jpeg&auto=webp)](https:\/\/www.businessinsider.com\/author\/tessa-campbell)\n\n[Tessa Campbell](https:\/\/www.businessinsider.com\/author\/tessa-campbell)\n\nInvesting and Retirement Reporter\n\nTessa Campbell was an investing and retirement reporter on Business Insider’s personal finance desk. Over two years of personal finance reporting, Tessa built expertise on a range of financial topics, from the best credit cards to the best retirement savings accounts.ExperienceTessa reported on all things investing — deep-diving into complex financial topics, shedding light on lesser-known investment avenues, and uncovering ways readers can work the system to their advantage.As a personal finance expert in her 20s, Tessa is acutely aware of the impacts time and uncertainty have on your investment decisions. While she curated Business Insider’s guide on the best investment apps, she believed that your financial portfolio does not have to be perfect, it just has to exist. A small investment is better than nothing, and the mistakes you make along the way are a necessary part of the learning process.Expertise: Tessa’s expertise includes:\n\n- Credit cards\n- Investing apps\n- Retirement savings\n- Cryptocurrency\n- The stock market\n- Retail investing\n\nEducation: Tessa graduated from Susquehanna University with a creative writing degree and a psychology minor.When she’s not digging into a financial topic, you’ll find Tessa waist-deep in her second cup of coffee. She currently drinks Kitty Town coffee, which blends her love of coffee with her love for her two cats: Keekee and Dumpling. It was a targeted advertisement, and it worked.\n\nRead more Read less","meta_canonical":null}

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URL	https://www.businessinsider.com/personal-finance/investing/what-is-an-etf
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Boilerpipe Text	Updated 2025-04-25T15:41:49.587Z An exchange-traded fund (ETF) represents a basket of securities that's traded on a stock exchange. While many ETFs track indexes, some are actively managed. ETFs have some advantages over mutual funds, but certain niche ETFs aren't always as liquid as some mutual funds. Exchange-traded funds (ETFs) have become one of the most popular investment products offered by many of the best investment apps . Investing in exchange-traded funds provides a low-cost and convenient way to diversify your portfolio, since you can gain access to a large pool of underlying assets within one investment. However, not all ETFs are the same. Some track broad stock market indexes, while others are sector-specific. And while they resemble mutual funds in many ways, there can be some pros and cons to choosing ETFs over other investments. So, before investing in ETFs, you'll want to understand what these funds involve, including the costs and risks, along with ETF benefits. ETF definition An ETF represents a basket of securities that is traded on stock market exchanges, much like any other stock. Technically, when you purchase a share of the ETF, you become a partial owner of the fund itself, but you're primarily gaining exposure to a wide range of underlying stocks or other assets, such as bonds or commodities . Your investment could increase or decrease in value as the prices of the underlying assets change. In many ways, an ETF is like a mutual fund , in that you're buying shares in an investment vehicle that uses investor capital to trade underlying securities, although the process differs a bit between them. For the average investor, one of the main things to know is that because ETFs trade on stock exchanges, their pricing updates in real time, and you can trade them throughout the day. In contrast, mutual funds only update their pricing and can be traded once per day, after the market closes. "Exchange-traded refers to the fund being able to be bought and sold during the trading day," says Curtis Bailey, a CFA, chief compliance officer and financial advisor at Quiet Wealth Management . "A fund is an ownership structure that allows an investor to own a portion of an underlying basket of securities." How ETFs work ETFs can be a little confusing when you dig deep into all the details, but for what the average investor experiences, they're usually easy to understand and trade. Creation and structure of ETFs An ETF is created when a financial institution registers with the Securities and Exchange Commission (SEC) to act as the fund sponsor/ETF manager, who is responsible for creating and redeeming ETF shares and managing the fund overall. ETF fund sponsors work with authorized participants (APs) — typically large broker-dealers — who buy the underlying securities that comprise the ETF. The AP then delivers those securities to the fund sponsor, who provides the AP with ETF shares that the AP then sells on the stock exchange. From there, the ETF shares can be bought and sold by any investor much like any other stock . You can even typically purchase ETFs on margin and place limit orders like you can with stocks, though make sure you understand the risks involved with those approaches. APs can also reverse the process by delivering ETF shares to the fund sponsor, who then retires those shares and delivers the underlying securities to the AP, such as if lots of ETF investors are selling their shares and the AP needs to bring the ETF price in line with the value of the underlying securities. This creation/redemption process isn't something that individual investors get involved with, nor is it necessarily something that they need to focus on. The main thing to know is that this interplay between the AP and ETF sponsor is what gives ETFs their intraday liquidity and enables the net asset value (NAV) — the price an ETF trades at — to accurately reflect what the underlying basket of securities is worth. Also, this creation/redemption process is the mechanism that allows ETFs to avoid triggering capital gains taxes the way that mutual funds do. Essentially, mutual fund shareholders face capital gains based on the overall trading activity of the fund, because the mutual fund is actually buying and selling securities. In contrast, ETFs are not exactly buying and selling the underlying securities, but rather they're making exchanges with the AP, which means ETF shareholders aren't incurring taxes on the underlying security sales. So, ETF shareholders only face capital gains based on their individual activity when buying and selling ETF shares. That can be particularly advantageous for those who want to hold ETFs long-term in a taxable account, as you can avoid capital gains during the years when you hold onto your assets. Trading on exchanges As the name implies, ETFs trade on exchanges — typically stock exchanges where you would find commonly traded stocks, like the New York Stock Exchange or NASDAQ. This helps make ETFs highly accessible. Most investors can simply open their brokerage app and place a buy or sell order for an ETF, just as they can for most stocks. Like with stocks, you may have to pay a transaction fee to your brokerage for each ETF trade. That fee, however, is exclusive to the brokerage, rather than being something that the ETF collects. Instead, ETFs have a percentage-based annual fee, like mutual funds, known as an expense ratio, which the ETF sponsor charges for running the fund. "The largest ETFs often have really low fees," says Bailey. "[But] some ETFs have higher expense ratios than actively managed mutual funds." The exchange price of an ETF typically reflects the underlying value of the securities the fund holds — for example, an ETF that tracks the S&P 500 will generally go up or down in unison (on a percentage basis, since the actual share price differs depending on the fund) with how those 500 companies in the S&P 500 perform. However, it's important to note that tracking errors or tracking differences — such as if the ETF holds slightly different securities than the benchmark index — could lead to a small discrepancy between the ETF's price and the value of the underlying assets in some cases, such as during periods of unusually high or low demand for an ETF. ETF tracking error/tracking difference As mentioned, ETFs don't always perfectly follow the pricing of their underlying securities. Tracking difference is the gap between the return of an investment/investment portfolio and the return of a chosen benchmark that the investment/portfolio is meant to follow. While this is often called tracking error, technically a tracking error is the representation of tracking difference as an annualized standard deviation percentage. For example, an ETF with a 0.1% tracking error typically varies 0.1% above or below the benchmark over the course of a year, though it's still possible to fall outside this standard range. A related phenomenon is how there can be a difference between the price people are willing to buy and sell shares of the ETF. The bid/ask spread — which is the difference between the offer/sell (ask) price and the purchase/buy (bid) price of a security — can essentially affect your individual tracking difference. With a wide bid/ask spread, such as on some less commonly traded ETFs, you might pay more than the market price in order to acquire those shares. "This spread may represent an additional hidden cost as an investor pays more to buy the shares and receives less to sell the shares," says Bailey. ETFs vs. mutual funds vs. index funds ETFs, mutual funds, and index funds share some similarities, but they are not interchangeable terms. As mentioned, an ETF is a fund that trades on an exchange and represents ownership of a pool of securities. ETFs have real-time pricing based on trading activity/underlying security prices, and they can be bought and sold throughout the trading day when the stock market is open (and sometimes after hours, depending on the brokerage). Mutual funds also hold a basket of securities. However, unlike ETFs, mutual funds are not traded on stock exchanges. Instead, a broker typically facilitates buy and sell orders between investors and the mutual fund company, or you might transact directly with the mutual fund company. As part of not being exchange-traded, mutual funds are only priced once per day after the market closes, based on the underlying security prices. Mutual funds often have higher initial minimum investment requirements and fees than ETFs, though it depends on the specific funds. However, mutual funds can hold advantages over ETFs, like sometimes being easier for buying fractional shares. Some ETFs, particularly ones with niche themes, might also be less liquid than some mutual funds. Although mutual funds don't have intraday liquidity, they arguably provide greater overall liquidity in the sense that the fund manager acts as a guaranteed trade partner and there's no bid/ask spread — the fund manager simply offers the price at which it will accept buy or sell orders. There are other important differences between mutual funds and ETFs for investors to consider as well, but the specifics vary based on the funds you're comparing. An index fund is a general term for a fund that tracks an index. Both ETFs and mutual funds could be index funds. A common simplification is that ETFs tend to track index funds while mutual funds are often actively managed, but you should not assume that's always the case. Look at the specific details for any fund you're considering. "It's important to understand the fund's underlying investments, strategy, and costs," says Bailey. ETF benefits Investing in ETFs provides several potential benefits, sometimes even above what individual stocks or mutual funds provide. The exact benefits depend on which ETF you're considering and what the alternatives are, but in general, some of the top pros of ETFs include the following: Diversification ETFs offer diversification by providing exposure to a basket of assets. So while you might just be buying one ETF, your investment is generally more diversified than investing in the stock of one individual company. That said, the level of diversification varies depending on the type of ETF. Liquidity ETFs tend to be highly liquid in the sense that you can typically buy and sell ETF shares as you wish throughout the trading day. Even if the underlying assets aren't very liquid, like if an ETF holds some private investments, the structure of the fund could provide some additional liquidity. Mutual funds are generally liquid, too, though it depends on the specific fund and how you look at liquidity. Some investors prefer the intraday liquidity of an ETF, while others prefer how mutual funds have no bid/ask spread, for example, as the fund manager always acts as a clear buyer or seller. Low costs ETFs tend to have lower expense ratios and lower investment minimums than mutual funds, though it depends on the type of fund. If you can find a brokerage that has low or no transaction fees, that can also help keep ETF costs down. That said, individual stocks do not have fund management fees like ETFs or mutual funds do. Tax efficiency Connected to low costs, ETFs tend to be more tax-efficient than mutual funds. That's because the structure of ETFs enables the creation and redemption of shares by APs to not trigger capital gains, whereas the activities of other investors in a mutual fund affect the overall fund's taxes. The best way to think about the difference is that ETFs are only taxed based on when you sell your shares or receive dividends, while mutual funds are also taxed based on the capital gains of the fund overall, even if you hold onto your shares. Transparency ETFs may seem complex at times, but they are transparent in the sense that expense ratios are clearly disclosed, and they typically disclose holdings on a daily basis, so you can understand what you're investing in. This is similar to the transparency of mutual funds, although mutual funds usually disclose holdings only on a monthly or quarterly basis; yet both are more transparent than some other vehicles like hedge funds. Risks of investing in ETFs While ETFs offer several benefits, there are also several risks to watch out for, such as: Market risk Like with any tradable asset, the value of ETFs can fluctuate based on what's happening with the overall market. You might invest in a well-managed ETF, but if investors are selling the declining stocks of the companies that the ETF invests in, then the ETF will generally follow suit in losing value. Also, some more exotic ETFs use leverage or short stocks (or gain short exposure through assets like derivatives), which can amplify losses more than if you invested directly in the underlying stocks. Tracking error/tracking difference Because ETFs are tradable securities, the price might not always reflect the underlying assets or the benchmark it tracks. It's possible, for example, that high demand for an ETF temporarily drives up the price above what the underlying securities are worth, which could cause the overall returns to slightly lag the benchmark. Liquidity risk While the liquidity of ETFs is generally seen as a positive, there are also some risks to consider. For one, less popular ETFs might not have much trading activity, so the bid/ask spreads could be wide, causing investors to essentially incur higher trading costs that affect net returns. Also, some argue that the intraday liquidity of ETFs makes them susceptible to overtrading, whereas you might feel more capable of taking a set-it-and-forget-it approach with mutual funds. Types of ETFs One way of categorizing ETFs is by management style. In that sense, there are two main types of ETFs: index-based ETFs and actively managed ETFs. Index-based ETFs are passively managed investments and track an index — a grouping of individual assets that share a common feature. For example, the S&P 500 is an index of the stocks of the 500 largest public companies in the US. Most ETFs are passively managed. Then there are actively managed ETFs, which generally aren't passively following an index. Instead, they often have a benchmark index and a fund manager or team tries to outperform the benchmark by trading assets a little differently than what the index does. One actively managed ETF example might be a fund that includes only certain companies within the S&P 500, rather than the whole index. Or, the fund manager might frequently buy and sell the stocks of S&P 500 companies to try to capture an edge, rather than just holding these assets. Generally, you'll pay higher fees for an actively managed ETF. That said, it's possible for an ETF to combine elements of passive and active, such as if a fund follows a custom index. Whether an ETF is passive or active, there can also be some different types of ETFs, such as the following: Stock ETFs Stock or equity ETFs often track a specific index of stocks. The index may be based on the companies' size, region, industry, or other commonalities. That said, a stock/equity ETF could be actively managed based on the stocks the fund manager thinks will perform well. Bond ETFs Bond or fixed-income ETFs track a portfolio of bonds or similar fixed-income assets, such as corporate and government debt. Commodity ETFs Commodity ETFs track the price of raw materials, such as gold or oil, perhaps by using futures contracts or holding physical assets. International ETFs International ETFs track companies from a specific country or region. These are often types of equity ETFs, but a bond ETF could also represent a basket of international fixed-income securities. Specialty ETFs There are many types of niche or specialty ETFs, such as those that track certain industries or follow investment themes like allocating to ESG investing in socially conscious companies. There are now even ETFs that track cryptocurrency . Real ETF examples With the different types of ETFs in mind, here are some real ETF examples: SPDR S&P 500 ETF Trust (SPY) is one of the first and most popular equity ETFs. It tracks the S&P 500. Invesco QQQ Trust (QQQ) is another popular equity ETF. It tracks the Nasdaq-100 Index, which is made up of the largest non-financial companies on the Nasdaq stock exchange . Vanguard Total International Stock Index Fund ETF Shares (VXUS) is an international equity ETF that tracks the FTSE Global All Cap ex US Index, an index representing a broad range of public companies outside the U.S. iShares Global Clean Energy ETF (ICLN) is a sector and thematic ETF that tracks the S&P Global Clean Energy Index. ARK Innovation ETF (ARKK) is a large, actively managed ETF that primarily invests in companies that create and use innovative technology. How to invest in ETFs Investing in ETFs is typically easy. You can buy and sell ETFs through a brokerage account by simply placing a buy or sell order, just as you would for other stocks. The exact ETFs available can differ by brokerage, but most online brokerage accounts/investing platforms offer ETFs in some capacity. But not all investing apps and brokerages do, so make sure to do your research before signing up. Beginners may have the best luck accessing ETFs with one of the best robo-advisors or the best investment apps for beginners . These platforms might serve as a good ETF guide by recommending certain ETFs to you, based on factors like your risk tolerance and investment style. But if you're a more hands-on investor, you can use online screeners and your brokerage's trading function to find ETFs that fit your investment goals. "Every investor should consider ETFs," says Bailey. "They are typically more tax-efficient and lower cost than mutual funds and offer diversification that would be hard to mimic through individual positions." However, complex and high-risk ETFs are also available. Before making an investment decision, consider how the particular ETF could impact your portfolio and how it compares to other types of funds. Start investing FAQs about ETFs The main difference between ETFs and mutual funds is that an ETF trades on a stock exchange, while a mutual fund only trades via a broker. As such, there are differences, such as ETFs having intraday liquidity. ETFs also often have tax advantages and lower costs. For many investors, ETFs are suitable for long-term, low-cost investing, but it depends on the specific ETF and the investor. A common long-term approach with ETFs is to buy and hold a low-cost ETF that tracks a diversified index like the S&P 500. An ETF might be better than an individual stock in terms of gaining quick diversification to a broad array of holdings, but the risk/reward can vary, depending on the type of ETF and stock. Yes, many ETFs pay dividends, based on the underlying holdings, such as fixed-income securities or dividend-paying stocks. However, dividend rates vary significantly by fund. The downsides to ETFs depend on the context, but some common negatives include the risk of investment losses, tracking error/tracking difference vs. an index, higher fees than investing directly in stocks (but lower than many mutual funds), and sometimes limited liquidity, which can widen bid/ask spreads. ETFs also might have downsides vs. mutual funds, such as not always enabling fractional investing. Jake Safane is a freelance writer specializing in finance and sustainability. He runs a corporate sustainability blog, Carbon Neutral Copy , and his work has appeared in publications such as The Economist, CBS MoneyWatch, and the Los Angeles Times. Experience Jake has been working in financial journalism since 2011, covering areas such as banking and investing for both businesses and individuals. His career has included a mix of in-house reporting jobs at B2B finance publications such as Global Custodian and FundFire, a role in sponsored research at The Economist, and freelance engagements with online publications, financial advisors, and fintech companies. His interest in personal finance dates back to joining his middle school stock trading club, where he learned about markets by doing simulated trading. A high school field trip to the New York Fed further cemented his fascination with the financial system and how seemingly academic concepts can make a big difference in the average person's life. His personal interest in the environment has also carried over into finance, such as by covering ESG and impact investing. He believes that one of the top ways to solve the climate crisis is by helping both businesses and individuals realize the long-term financial benefits that sustainability can bring. In his personal life, he also enjoys playing tennis, going to the gym, and going to the beach with his family — though often just for walks along a paved path, because vacuuming sand trekked in by a toddler and dog really cuts into writing time. Expertise Jake’s areas of personal finance expertise include: Investing Banking Financial Planning Retirement Insurance Education Jake is a graduate of Boston University, where he wrote for The Daily Free Press and had a show on the school's radio station. Read more Read less Tessa Campbell Investing and Retirement Reporter Tessa Campbell was an investing and retirement reporter on Business Insider’s personal finance desk. Over two years of personal finance reporting, Tessa built expertise on a range of financial topics, from the best credit cards to the best retirement savings accounts. Experience Tessa reported on all things investing — deep-diving into complex financial topics, shedding light on lesser-known investment avenues, and uncovering ways readers can work the system to their advantage. As a personal finance expert in her 20s, Tessa is acutely aware of the impacts time and uncertainty have on your investment decisions. While she curated Business Insider’s guide on the best investment apps, she believed that your financial portfolio does not have to be perfect, it just has to exist. A small investment is better than nothing, and the mistakes you make along the way are a necessary part of the learning process. Expertise: Tessa’s expertise includes: Credit cards Investing apps Retirement savings Cryptocurrency The stock market Retail investing Education: Tessa graduated from Susquehanna University with a creative writing degree and a psychology minor. When she’s not digging into a financial topic, you’ll find Tessa waist-deep in her second cup of coffee. She currently drinks Kitty Town coffee, which blends her love of coffee with her love for her two cats: Keekee and Dumpling. It was a targeted advertisement, and it worked. Read more Read less
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However, our opinions are our own. See [how we rate investing products](https://www.businessinsider.com/personal-finance/investing/investing-rating-methodology) to write unbiased product reviews. ![Man invests in ETF funds on his mobile device outside.](https://i.insider.com/66f194cace3009a0fac87ebc?width=700) ETFs are among the most popular investment funds because they offer exposure to a variety of stocks or other assets. Eva-Katalin/Getty Images [ETF definition](https://www.businessinsider.com/personal-finance/investing/what-is-an-etf#etf-definition) [How ETFs work](https://www.businessinsider.com/personal-finance/investing/what-is-an-etf#how-etfs-work) [ETFs vs. mutual funds vs. index funds](https://www.businessinsider.com/personal-finance/investing/what-is-an-etf#etfs-vs.-mutual-funds-vs.-index-funds) [ETF benefits](https://www.businessinsider.com/personal-finance/investing/what-is-an-etf#etf-benefits) [Risks of investing in ETFs](https://www.businessinsider.com/personal-finance/investing/what-is-an-etf#risks-of-investing-in-etfs) [Types of ETFs](https://www.businessinsider.com/personal-finance/investing/what-is-an-etf#types-of-etfs) [Real ETF examples](https://www.businessinsider.com/personal-finance/investing/what-is-an-etf#real-etf-examples) [How to invest in ETFs](https://www.businessinsider.com/personal-finance/investing/what-is-an-etf#how-to-invest-in-etfs) [Start investing](https://www.businessinsider.com/personal-finance/investing/what-is-an-etf#start-investing) [FAQs](https://www.businessinsider.com/personal-finance/investing/what-is-an-etf#faqs) Updated 2025-04-25T15:41:49.587Z Share Copy link [Email](<mailto:?subject=Exchange traded funds (ETFs): A comprehensive guide to investing in ETFs&body=Exchange%20traded%20funds%20(ETFs)%3A%20A%20comprehensive%20guide%20to%20investing%20in%20ETFs%0D%0A%0D%0Ahttps%3A%2F%2Fwww.businessinsider.com%2Fpersonal-finance%2Finvesting%2Fwhat-is-an-etf&> "Email") Facebook WhatsApp X LinkedIn Bluesky Threads An icon in the shape of a lightning bolt. Impact Link Save Saved [Read in app](https://insider-app.onelink.me/4cpG/?af_js_web=true&af_ss_ver=2_3_0&af_dp=insider%3A%2F%2Fbi%2Fpost%2Fpersonal-finance%2Finvesting%2Fwhat-is-an-etf&af_force_deeplink=true&is_retargeting=true&deep_link_value=https%3A%2F%2Fwww.businessinsider.com%2Fpersonal-finance%2Finvesting%2Fwhat-is-an-etf&pid=businessinsider&c=post_page_share_bar_v2_smart_4.13.23 "Download the app") - An exchange-traded fund (ETF) represents a basket of securities that's traded on a stock exchange. - While many ETFs track indexes, some are actively managed. - ETFs have some advantages over mutual funds, but certain niche ETFs aren't always as liquid as some mutual funds. Exchange-traded funds (ETFs) have become one of the most popular investment products offered by many of the [best investment apps](https://www.businessinsider.com/personal-finance/investing/what-are-the-best-investment-apps). Investing in exchange-traded funds provides a low-cost and convenient way to diversify your portfolio, since you can gain access to a large pool of underlying assets within one investment. However, not all ETFs are the same. Some track broad stock market indexes, while others are sector-specific. And while they resemble mutual funds in many ways, there can be some pros and cons to choosing ETFs over other investments. So, before investing in ETFs, you'll want to understand what these funds involve, including the costs and risks, along with ETF benefits. ## ETF definition An ETF represents a basket of securities that is traded on [stock market](https://www.businessinsider.com/personal-finance/investing/what-is-the-stock-market) exchanges, much like any other stock. Technically, when you purchase a share of the ETF, you become a partial owner of the fund itself, but you're primarily gaining exposure to a wide range of underlying stocks or other assets, such as [bonds](https://www.businessinsider.com/personal-finance/investing/what-is-a-bond) or [commodities](https://www.businessinsider.com/personal-finance/investing/what-are-commodities). Your investment could increase or decrease in value as the prices of the underlying assets change. In many ways, an ETF is like a [mutual fund](https://www.businessinsider.com/personal-finance/investing/how-to-invest-in-mutual-funds), in that you're buying shares in an investment vehicle that uses investor capital to trade underlying securities, although the process differs a bit between them. For the average investor, one of the main things to know is that because ETFs trade on stock exchanges, their pricing updates in real time, and you can trade them throughout the day. In contrast, mutual funds only update their pricing and can be traded once per day, after the market closes. "Exchange-traded refers to the fund being able to be bought and sold during the trading day," says Curtis Bailey, a CFA, chief compliance officer and financial advisor at [Quiet Wealth Management](https://quietwealth.net/). "A fund is an ownership structure that allows an investor to own a portion of an underlying basket of securities." ## How ETFs work ETFs can be a little confusing when you dig deep into all the details, but for what the average investor experiences, they're usually easy to understand and trade. ### Creation and structure of ETFs An ETF is created when a financial institution registers with the [Securities and Exchange Commission](https://www.businessinsider.com/personal-finance/investing/securities-and-exchange-commission)(SEC) to act as the fund sponsor/ETF manager, who is responsible for creating and redeeming ETF shares and managing the fund overall. ETF fund sponsors work with authorized participants (APs) — typically large broker-dealers — who buy the underlying securities that comprise the ETF. The AP then delivers those securities to the fund sponsor, who provides the AP with ETF shares that the AP then sells on the stock exchange. From there, the ETF shares can be bought and sold by any investor much like any other [stock](https://www.businessinsider.com/personal-finance/investing/how-to-buy-stock). You can even typically purchase ETFs on [margin](https://www.businessinsider.com/personal-finance/investing/what-is-margin-trading-how-it-works) and place [limit orders](https://www.businessinsider.com/personal-finance/investing/stop-limit-order) like you can with stocks, though make sure you understand the risks involved with those approaches. APs can also reverse the process by delivering ETF shares to the fund sponsor, who then retires those shares and delivers the underlying securities to the AP, such as if lots of ETF investors are selling their shares and the AP needs to bring the ETF price in line with the value of the underlying securities. This creation/redemption process isn't something that individual investors get involved with, nor is it necessarily something that they need to focus on. The main thing to know is that this interplay between the AP and ETF sponsor is what gives ETFs their intraday liquidity and enables the net asset value (NAV) — the price an ETF trades at — to accurately reflect what the underlying basket of securities is worth. Also, this creation/redemption process is the mechanism that allows ETFs to avoid triggering [capital gains taxes](https://www.businessinsider.com/personal-finance/taxes/capital-gains-tax-rates) the way that mutual funds do. Essentially, mutual fund shareholders face capital gains based on the overall trading activity of the fund, because the mutual fund is actually buying and selling securities. In contrast, ETFs are not exactly buying and selling the underlying securities, but rather they're making exchanges with the AP, which means ETF shareholders aren't incurring taxes on the underlying security sales. So, ETF shareholders only face capital gains based on their individual activity when buying and selling ETF shares. That can be particularly advantageous for those who want to hold ETFs long-term in a taxable account, as you can avoid capital gains during the years when you hold onto your assets. ### Trading on exchanges As the name implies, ETFs trade on exchanges — typically stock exchanges where you would find commonly traded stocks, like the New York Stock Exchange or NASDAQ. This helps make ETFs highly accessible. Most investors can simply open their [brokerage app](https://www.businessinsider.com/personal-finance/investing/best-stock-trading-apps) and place a buy or sell order for an ETF, just as they can for most stocks. Like with stocks, you may have to pay a transaction fee to your brokerage for each ETF trade. That fee, however, is exclusive to the brokerage, rather than being something that the ETF collects. Instead, ETFs have a percentage-based annual fee, like mutual funds, known as an expense ratio, which the ETF sponsor charges for running the fund. "The largest ETFs often have really low fees," says Bailey. "\[But\] some ETFs have higher expense ratios than actively managed mutual funds." The exchange price of an ETF typically reflects the underlying value of the securities the fund holds — for example, an ETF that tracks the S\&P 500 will generally go up or down in unison (on a percentage basis, since the actual share price differs depending on the fund) with how those 500 companies in the S\&P 500 perform. However, it's important to note that tracking errors or tracking differences — such as if the ETF holds slightly different securities than the benchmark index — could lead to a small discrepancy between the ETF's price and the value of the underlying assets in some cases, such as during periods of unusually high or low demand for an ETF. ### ETF tracking error/tracking difference As mentioned, ETFs don't always perfectly follow the pricing of their underlying securities. Tracking difference is the gap between the return of an investment/investment portfolio and the return of a chosen benchmark that the investment/portfolio is meant to follow. While this is often called tracking error, technically a tracking error is the representation of tracking difference as an annualized standard deviation percentage. For example, an ETF with a 0.1% tracking error typically varies 0.1% above or below the benchmark over the course of a year, though it's still possible to fall outside this standard range. A related phenomenon is how there can be a difference between the price people are willing to buy and sell shares of the ETF. The bid/ask spread — which is the difference between the offer/sell (ask) price and the purchase/buy (bid) price of a security — can essentially affect your individual tracking difference. With a wide bid/ask spread, such as on some less commonly traded ETFs, you might pay more than the market price in order to acquire those shares. "This spread may represent an additional hidden cost as an investor pays more to buy the shares and receives less to sell the shares," says Bailey. ## ETFs vs. mutual funds vs. index funds ETFs, mutual funds, and index funds share some similarities, but they are not interchangeable terms. As mentioned, an ETF is a fund that trades on an exchange and represents ownership of a pool of securities. ETFs have real-time pricing based on trading activity/underlying security prices, and they can be bought and sold throughout the trading day when the stock market is open (and sometimes after hours, depending on the brokerage). Mutual funds also hold a basket of securities. However, unlike ETFs, mutual funds are not traded on stock exchanges. Instead, a broker typically facilitates buy and sell orders between investors and the mutual fund company, or you might transact directly with the mutual fund company. As part of not being exchange-traded, mutual funds are only priced once per day after the market closes, based on the underlying security prices. Mutual funds often have higher initial minimum investment requirements and fees than ETFs, though it depends on the specific funds. However, mutual funds can hold advantages over ETFs, like sometimes being easier for buying fractional shares. Some ETFs, particularly ones with niche themes, might also be less [liquid](https://www.businessinsider.com/personal-finance/investing/what-is-liquidity) than some mutual funds. Although mutual funds don't have intraday liquidity, they arguably provide greater overall liquidity in the sense that the fund manager acts as a guaranteed trade partner and there's no bid/ask spread — the fund manager simply offers the price at which it will accept buy or sell orders. There are other important differences between [mutual funds and ETFs](https://www.businessinsider.com/personal-finance/investing/etf-vs-mutual-fund) for investors to consider as well, but the specifics vary based on the funds you're comparing. An [index fund](https://www.businessinsider.com/personal-finance/investing/how-to-invest-in-index-funds) is a general term for a fund that tracks an index. Both ETFs and mutual funds could be index funds. A common simplification is that ETFs tend to track index funds while mutual funds are often actively managed, but you should not assume that's always the case. Look at the specific details for any fund you're considering. "It's important to understand the fund's underlying investments, strategy, and costs," says Bailey. ## ETF benefits Investing in ETFs provides several potential benefits, sometimes even above what individual stocks or mutual funds provide. The exact benefits depend on which ETF you're considering and what the alternatives are, but in general, some of the top pros of ETFs include the following: ### Diversification ETFs offer [diversification](https://www.businessinsider.com/personal-finance/investing/what-is-diversification) by providing exposure to a basket of assets. So while you might just be buying one ETF, your investment is generally more diversified than investing in the stock of one individual company. That said, the level of diversification varies depending on the type of ETF. ### Liquidity ETFs tend to be highly liquid in the sense that you can typically buy and sell ETF shares as you wish throughout the trading day. Even if the underlying assets aren't very liquid, like if an ETF holds some private investments, the structure of the fund could provide some additional liquidity. Mutual funds are generally liquid, too, though it depends on the specific fund and how you look at liquidity. Some investors prefer the intraday [liquidity](https://www.businessinsider.com/personal-finance/investing/what-is-liquidity) of an ETF, while others prefer how mutual funds have no bid/ask spread, for example, as the fund manager always acts as a clear buyer or seller. ### Low costs ETFs tend to have lower expense ratios and lower investment minimums than mutual funds, though it depends on the type of fund. If you can find a brokerage that has low or no transaction fees, that can also help keep ETF costs down. That said, individual stocks do not have fund management fees like ETFs or mutual funds do. ### Tax efficiency Connected to low costs, ETFs tend to be more tax-efficient than mutual funds. That's because the structure of ETFs enables the creation and redemption of shares by APs to not trigger capital gains, whereas the activities of other investors in a mutual fund affect the overall fund's taxes. The best way to think about the difference is that ETFs are only taxed based on when you sell your shares or receive dividends, while mutual funds are also taxed based on the capital gains of the fund overall, even if you hold onto your shares. ### Transparency ETFs may seem complex at times, but they are transparent in the sense that expense ratios are clearly disclosed, and they typically disclose holdings on a daily basis, so you can understand what you're investing in. This is similar to the transparency of mutual funds, although mutual funds usually disclose holdings only on a monthly or quarterly basis; yet both are more transparent than some other vehicles like hedge funds. ## Risks of investing in ETFs While ETFs offer several benefits, there are also several risks to watch out for, such as: ### Market risk Like with any tradable asset, the value of ETFs can fluctuate based on what's happening with the overall market. You might invest in a well-managed ETF, but if investors are selling the declining stocks of the companies that the ETF invests in, then the ETF will generally follow suit in losing value. Also, some more exotic ETFs use leverage or short stocks (or gain short exposure through assets like derivatives), which can amplify losses more than if you invested directly in the underlying stocks. ### Tracking error/tracking difference Because ETFs are tradable securities, the price might not always reflect the underlying assets or the benchmark it tracks. It's possible, for example, that high demand for an ETF temporarily drives up the price above what the underlying securities are worth, which could cause the overall returns to slightly lag the benchmark. ### Liquidity risk While the liquidity of ETFs is generally seen as a positive, there are also some risks to consider. For one, less popular ETFs might not have much trading activity, so the bid/ask spreads could be wide, causing investors to essentially incur higher trading costs that affect net returns. Also, some argue that the intraday liquidity of ETFs makes them susceptible to overtrading, whereas you might feel more capable of taking a set-it-and-forget-it approach with mutual funds. ## Types of ETFs One way of categorizing ETFs is by management style. In that sense, there are two main types of ETFs: index-based ETFs and actively managed ETFs. Index-based ETFs are [passively managed investments](https://www.businessinsider.com/personal-finance/investing/passive-vs-active-investing) and track an index — a grouping of individual assets that share a common feature. For example, the [S\&P 500](https://www.businessinsider.com/personal-finance/investing/what-is-the-sp-500) is an index of the stocks of the 500 largest public companies in the US. Most ETFs are passively managed. Then there are actively managed ETFs, which generally aren't passively following an index. Instead, they often have a benchmark index and a fund manager or team tries to outperform the benchmark by trading assets a little differently than what the index does. One actively managed ETF example might be a fund that includes only certain companies within the S\&P 500, rather than the whole index. Or, the fund manager might frequently buy and sell the stocks of S\&P 500 companies to try to capture an edge, rather than just holding these assets. Generally, you'll pay higher fees for an actively managed ETF. That said, it's possible for an ETF to combine elements of passive and active, such as if a fund follows a custom index. Whether an ETF is passive or active, there can also be some different types of ETFs, such as the following: ### Stock ETFs Stock or equity ETFs often track a specific index of stocks. The index may be based on the companies' size, region, industry, or other commonalities. That said, a stock/equity ETF could be actively managed based on the stocks the fund manager thinks will perform well. ### Bond ETFs Bond or fixed-income ETFs track a portfolio of bonds or similar fixed-income assets, such as corporate and government debt. ### Commodity ETFs Commodity ETFs track the price of raw materials, such as gold or oil, perhaps by using futures contracts or holding physical assets. ### International ETFs International ETFs track companies from a specific country or region. These are often types of equity ETFs, but a bond ETF could also represent a basket of international fixed-income securities. ### Specialty ETFs There are many types of niche or specialty ETFs, such as those that track certain industries or follow investment themes like allocating to [ESG investing](https://www.businessinsider.com/personal-finance/investing/esg-investing) in socially conscious companies. There are now even ETFs that track [cryptocurrency](https://www.businessinsider.com/personal-finance/investing/what-is-cryptocurrency). ## Real ETF examples With the different types of ETFs in mind, here are some real ETF examples: - [SPDR S\&P 500 ETF Trust (SPY)](https://markets.businessinsider.com/etfs/spdr-sp-500-etf-trust-us78462f1030) is one of the first and most popular equity ETFs. It tracks the S\&P 500. - [Invesco QQQ Trust (QQQ)](https://markets.businessinsider.com/etfs/invesco-qqq-trust-us46090e1038) is another popular equity ETF. It tracks the Nasdaq-100 Index, which is made up of the largest non-financial companies on the [Nasdaq stock exchange](https://www.businessinsider.com/personal-finance/investing/what-is-nasdaq). - [Vanguard Total International Stock Index Fund ETF Shares (VXUS)](https://markets.businessinsider.com/etfs/vanguard-total-international-stock-index-fund-etf-shares-us9219097683) is an international equity ETF that tracks the FTSE Global All Cap ex US Index, an index representing a broad range of public companies outside the U.S. - [iShares Global Clean Energy ETF (ICLN)](https://markets.businessinsider.com/etfs/ishares-global-clean-energy-etf-us4642882249) is a sector and thematic ETF that tracks the S\&P Global Clean Energy Index. - [ARK Innovation ETF (ARKK)](https://markets.businessinsider.com/etfs/ark-innovation-etf-us00214q1040) is a large, actively managed ETF that primarily invests in companies that create and use innovative technology. ## How to invest in ETFs Investing in ETFs is typically easy. You can buy and sell ETFs through a brokerage account by simply placing a buy or sell order, just as you would for other stocks. The exact ETFs available can differ by brokerage, but most online brokerage accounts/investing platforms offer ETFs in some capacity. But not all investing apps and brokerages do, so make sure to do your research before signing up. Beginners may have the best luck accessing ETFs with one of the [best robo-advisors](https://www.businessinsider.com/personal-finance/investing/best-robo-advisors) or the [best investment apps for beginners](https://www.businessinsider.com/personal-finance/investing/best-investment-apps-for-beginners). These platforms might serve as a good ETF guide by recommending certain ETFs to you, based on factors like your risk tolerance and investment style. But if you're a more hands-on investor, you can use online screeners and your brokerage's trading function to find ETFs that fit your investment goals. "Every investor should consider ETFs," says Bailey. "They are typically more tax-efficient and lower cost than mutual funds and offer diversification that would be hard to mimic through individual positions." However, complex and high-risk ETFs are also available. Before making an investment decision, consider how the particular ETF could impact your portfolio and how it compares to other types of funds. ## Start investing ## FAQs about ETFs ### What's the difference between ETFs and mutual funds? It indicates an expandable section or menu, or sometimes previous / next navigation options. The main difference between ETFs and mutual funds is that an ETF trades on a stock exchange, while a mutual fund only trades via a broker. As such, there are differences, such as ETFs having intraday liquidity. ETFs also often have tax advantages and lower costs. ### Are ETFs suitable for long-term investing? It indicates an expandable section or menu, or sometimes previous / next navigation options. For many investors, ETFs are suitable for long-term, low-cost investing, but it depends on the specific ETF and the investor. A common long-term approach with ETFs is to buy and hold a low-cost ETF that tracks a diversified index like the S\&P 500. ### Is an ETF better than a stock? It indicates an expandable section or menu, or sometimes previous / next navigation options. An ETF might be better than an individual stock in terms of gaining quick diversification to a broad array of holdings, but the risk/reward can vary, depending on the type of ETF and stock. ### Do ETFs pay dividends? It indicates an expandable section or menu, or sometimes previous / next navigation options. Yes, many ETFs pay dividends, based on the underlying holdings, such as fixed-income securities or dividend-paying stocks. However, dividend rates vary significantly by fund. ### What are the downsides to ETFs? It indicates an expandable section or menu, or sometimes previous / next navigation options. The downsides to ETFs depend on the context, but some common negatives include the risk of investment losses, tracking error/tracking difference vs. an index, higher fees than investing directly in stocks (but lower than many mutual funds), and sometimes limited liquidity, which can widen bid/ask spreads. ETFs also might have downsides vs. mutual funds, such as not always enabling fractional investing. [![Jake Safane](<data:image/svg+xml,%3Csvg xmlns='http://www.w3.org/2000/svg' viewBox='0 0 1 1'%3E%3C/svg%3E>) ![](https://i.insider.com/652eb00f211def8ed8373e18?crop=1:1&width=256&format=jpeg&auto=webp)](https://www.businessinsider.com/author/jake-safane) [Jake Safane](https://www.businessinsider.com/author/jake-safane) Jake Safane is a freelance writer specializing in finance and sustainability. He runs a corporate sustainability blog, [Carbon Neutral Copy](https://carbonneutralcopy.com/), and his work has appeared in publications such as The Economist, CBS MoneyWatch, and the Los Angeles Times.ExperienceJake has been working in financial journalism since 2011, covering areas such as banking and investing for both businesses and individuals. His career has included a mix of in-house reporting jobs at B2B finance publications such as Global Custodian and FundFire, a role in sponsored research at The Economist, and freelance engagements with online publications, financial advisors, and fintech companies.His interest in personal finance dates back to joining his middle school stock trading club, where he learned about markets by doing simulated trading. A high school field trip to the New York Fed further cemented his fascination with the financial system and how seemingly academic concepts can make a big difference in the average person's life.His personal interest in the environment has also carried over into finance, such as by covering ESG and impact investing. He believes that one of the top ways to solve the climate crisis is by helping both businesses and individuals realize the long-term financial benefits that sustainability can bring.In his personal life, he also enjoys playing tennis, going to the gym, and going to the beach with his family — though often just for walks along a paved path, because vacuuming sand trekked in by a toddler and dog really cuts into writing time.ExpertiseJake’s areas of personal finance expertise include: - Investing - Banking - Financial Planning - Retirement - Insurance EducationJake is a graduate of Boston University, where he wrote for The Daily Free Press and had a show on the school's radio station. Read more Read less [![Tessa Campbell](<data:image/svg+xml,%3Csvg xmlns='http://www.w3.org/2000/svg' viewBox='0 0 1 1'%3E%3C/svg%3E>) ![](https://i.insider.com/6494561e65b9ce0018a46b81?crop=1:1&width=256&format=jpeg&auto=webp)](https://www.businessinsider.com/author/tessa-campbell) [Tessa Campbell](https://www.businessinsider.com/author/tessa-campbell) Investing and Retirement Reporter Tessa Campbell was an investing and retirement reporter on Business Insider’s personal finance desk. Over two years of personal finance reporting, Tessa built expertise on a range of financial topics, from the best credit cards to the best retirement savings accounts.ExperienceTessa reported on all things investing — deep-diving into complex financial topics, shedding light on lesser-known investment avenues, and uncovering ways readers can work the system to their advantage.As a personal finance expert in her 20s, Tessa is acutely aware of the impacts time and uncertainty have on your investment decisions. While she curated Business Insider’s guide on the best investment apps, she believed that your financial portfolio does not have to be perfect, it just has to exist. 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Readable Markdown	Updated 2025-04-25T15:41:49.587Z - An exchange-traded fund (ETF) represents a basket of securities that's traded on a stock exchange. - While many ETFs track indexes, some are actively managed. - ETFs have some advantages over mutual funds, but certain niche ETFs aren't always as liquid as some mutual funds. Exchange-traded funds (ETFs) have become one of the most popular investment products offered by many of the [best investment apps](https://www.businessinsider.com/personal-finance/investing/what-are-the-best-investment-apps). Investing in exchange-traded funds provides a low-cost and convenient way to diversify your portfolio, since you can gain access to a large pool of underlying assets within one investment. However, not all ETFs are the same. Some track broad stock market indexes, while others are sector-specific. And while they resemble mutual funds in many ways, there can be some pros and cons to choosing ETFs over other investments. So, before investing in ETFs, you'll want to understand what these funds involve, including the costs and risks, along with ETF benefits. ## ETF definition An ETF represents a basket of securities that is traded on [stock market](https://www.businessinsider.com/personal-finance/investing/what-is-the-stock-market) exchanges, much like any other stock. Technically, when you purchase a share of the ETF, you become a partial owner of the fund itself, but you're primarily gaining exposure to a wide range of underlying stocks or other assets, such as [bonds](https://www.businessinsider.com/personal-finance/investing/what-is-a-bond) or [commodities](https://www.businessinsider.com/personal-finance/investing/what-are-commodities). Your investment could increase or decrease in value as the prices of the underlying assets change. In many ways, an ETF is like a [mutual fund](https://www.businessinsider.com/personal-finance/investing/how-to-invest-in-mutual-funds), in that you're buying shares in an investment vehicle that uses investor capital to trade underlying securities, although the process differs a bit between them. For the average investor, one of the main things to know is that because ETFs trade on stock exchanges, their pricing updates in real time, and you can trade them throughout the day. In contrast, mutual funds only update their pricing and can be traded once per day, after the market closes. "Exchange-traded refers to the fund being able to be bought and sold during the trading day," says Curtis Bailey, a CFA, chief compliance officer and financial advisor at [Quiet Wealth Management](https://quietwealth.net/). "A fund is an ownership structure that allows an investor to own a portion of an underlying basket of securities." ## How ETFs work ETFs can be a little confusing when you dig deep into all the details, but for what the average investor experiences, they're usually easy to understand and trade. ### Creation and structure of ETFs An ETF is created when a financial institution registers with the [Securities and Exchange Commission](https://www.businessinsider.com/personal-finance/investing/securities-and-exchange-commission)(SEC) to act as the fund sponsor/ETF manager, who is responsible for creating and redeeming ETF shares and managing the fund overall. ETF fund sponsors work with authorized participants (APs) — typically large broker-dealers — who buy the underlying securities that comprise the ETF. The AP then delivers those securities to the fund sponsor, who provides the AP with ETF shares that the AP then sells on the stock exchange. From there, the ETF shares can be bought and sold by any investor much like any other [stock](https://www.businessinsider.com/personal-finance/investing/how-to-buy-stock). You can even typically purchase ETFs on [margin](https://www.businessinsider.com/personal-finance/investing/what-is-margin-trading-how-it-works) and place [limit orders](https://www.businessinsider.com/personal-finance/investing/stop-limit-order) like you can with stocks, though make sure you understand the risks involved with those approaches. APs can also reverse the process by delivering ETF shares to the fund sponsor, who then retires those shares and delivers the underlying securities to the AP, such as if lots of ETF investors are selling their shares and the AP needs to bring the ETF price in line with the value of the underlying securities. This creation/redemption process isn't something that individual investors get involved with, nor is it necessarily something that they need to focus on. The main thing to know is that this interplay between the AP and ETF sponsor is what gives ETFs their intraday liquidity and enables the net asset value (NAV) — the price an ETF trades at — to accurately reflect what the underlying basket of securities is worth. Also, this creation/redemption process is the mechanism that allows ETFs to avoid triggering [capital gains taxes](https://www.businessinsider.com/personal-finance/taxes/capital-gains-tax-rates) the way that mutual funds do. Essentially, mutual fund shareholders face capital gains based on the overall trading activity of the fund, because the mutual fund is actually buying and selling securities. In contrast, ETFs are not exactly buying and selling the underlying securities, but rather they're making exchanges with the AP, which means ETF shareholders aren't incurring taxes on the underlying security sales. So, ETF shareholders only face capital gains based on their individual activity when buying and selling ETF shares. That can be particularly advantageous for those who want to hold ETFs long-term in a taxable account, as you can avoid capital gains during the years when you hold onto your assets. ### Trading on exchanges As the name implies, ETFs trade on exchanges — typically stock exchanges where you would find commonly traded stocks, like the New York Stock Exchange or NASDAQ. This helps make ETFs highly accessible. Most investors can simply open their [brokerage app](https://www.businessinsider.com/personal-finance/investing/best-stock-trading-apps) and place a buy or sell order for an ETF, just as they can for most stocks. Like with stocks, you may have to pay a transaction fee to your brokerage for each ETF trade. That fee, however, is exclusive to the brokerage, rather than being something that the ETF collects. Instead, ETFs have a percentage-based annual fee, like mutual funds, known as an expense ratio, which the ETF sponsor charges for running the fund. "The largest ETFs often have really low fees," says Bailey. "\[But\] some ETFs have higher expense ratios than actively managed mutual funds." The exchange price of an ETF typically reflects the underlying value of the securities the fund holds — for example, an ETF that tracks the S\&P 500 will generally go up or down in unison (on a percentage basis, since the actual share price differs depending on the fund) with how those 500 companies in the S\&P 500 perform. However, it's important to note that tracking errors or tracking differences — such as if the ETF holds slightly different securities than the benchmark index — could lead to a small discrepancy between the ETF's price and the value of the underlying assets in some cases, such as during periods of unusually high or low demand for an ETF. ### ETF tracking error/tracking difference As mentioned, ETFs don't always perfectly follow the pricing of their underlying securities. Tracking difference is the gap between the return of an investment/investment portfolio and the return of a chosen benchmark that the investment/portfolio is meant to follow. While this is often called tracking error, technically a tracking error is the representation of tracking difference as an annualized standard deviation percentage. For example, an ETF with a 0.1% tracking error typically varies 0.1% above or below the benchmark over the course of a year, though it's still possible to fall outside this standard range. A related phenomenon is how there can be a difference between the price people are willing to buy and sell shares of the ETF. The bid/ask spread — which is the difference between the offer/sell (ask) price and the purchase/buy (bid) price of a security — can essentially affect your individual tracking difference. With a wide bid/ask spread, such as on some less commonly traded ETFs, you might pay more than the market price in order to acquire those shares. "This spread may represent an additional hidden cost as an investor pays more to buy the shares and receives less to sell the shares," says Bailey. ## ETFs vs. mutual funds vs. index funds ETFs, mutual funds, and index funds share some similarities, but they are not interchangeable terms. As mentioned, an ETF is a fund that trades on an exchange and represents ownership of a pool of securities. ETFs have real-time pricing based on trading activity/underlying security prices, and they can be bought and sold throughout the trading day when the stock market is open (and sometimes after hours, depending on the brokerage). Mutual funds also hold a basket of securities. However, unlike ETFs, mutual funds are not traded on stock exchanges. Instead, a broker typically facilitates buy and sell orders between investors and the mutual fund company, or you might transact directly with the mutual fund company. As part of not being exchange-traded, mutual funds are only priced once per day after the market closes, based on the underlying security prices. Mutual funds often have higher initial minimum investment requirements and fees than ETFs, though it depends on the specific funds. However, mutual funds can hold advantages over ETFs, like sometimes being easier for buying fractional shares. Some ETFs, particularly ones with niche themes, might also be less [liquid](https://www.businessinsider.com/personal-finance/investing/what-is-liquidity) than some mutual funds. Although mutual funds don't have intraday liquidity, they arguably provide greater overall liquidity in the sense that the fund manager acts as a guaranteed trade partner and there's no bid/ask spread — the fund manager simply offers the price at which it will accept buy or sell orders. There are other important differences between [mutual funds and ETFs](https://www.businessinsider.com/personal-finance/investing/etf-vs-mutual-fund) for investors to consider as well, but the specifics vary based on the funds you're comparing. An [index fund](https://www.businessinsider.com/personal-finance/investing/how-to-invest-in-index-funds) is a general term for a fund that tracks an index. Both ETFs and mutual funds could be index funds. A common simplification is that ETFs tend to track index funds while mutual funds are often actively managed, but you should not assume that's always the case. Look at the specific details for any fund you're considering. "It's important to understand the fund's underlying investments, strategy, and costs," says Bailey. ## ETF benefits Investing in ETFs provides several potential benefits, sometimes even above what individual stocks or mutual funds provide. The exact benefits depend on which ETF you're considering and what the alternatives are, but in general, some of the top pros of ETFs include the following: ### Diversification ETFs offer [diversification](https://www.businessinsider.com/personal-finance/investing/what-is-diversification) by providing exposure to a basket of assets. So while you might just be buying one ETF, your investment is generally more diversified than investing in the stock of one individual company. That said, the level of diversification varies depending on the type of ETF. ### Liquidity ETFs tend to be highly liquid in the sense that you can typically buy and sell ETF shares as you wish throughout the trading day. Even if the underlying assets aren't very liquid, like if an ETF holds some private investments, the structure of the fund could provide some additional liquidity. Mutual funds are generally liquid, too, though it depends on the specific fund and how you look at liquidity. Some investors prefer the intraday [liquidity](https://www.businessinsider.com/personal-finance/investing/what-is-liquidity) of an ETF, while others prefer how mutual funds have no bid/ask spread, for example, as the fund manager always acts as a clear buyer or seller. ### Low costs ETFs tend to have lower expense ratios and lower investment minimums than mutual funds, though it depends on the type of fund. If you can find a brokerage that has low or no transaction fees, that can also help keep ETF costs down. That said, individual stocks do not have fund management fees like ETFs or mutual funds do. ### Tax efficiency Connected to low costs, ETFs tend to be more tax-efficient than mutual funds. That's because the structure of ETFs enables the creation and redemption of shares by APs to not trigger capital gains, whereas the activities of other investors in a mutual fund affect the overall fund's taxes. The best way to think about the difference is that ETFs are only taxed based on when you sell your shares or receive dividends, while mutual funds are also taxed based on the capital gains of the fund overall, even if you hold onto your shares. ### Transparency ETFs may seem complex at times, but they are transparent in the sense that expense ratios are clearly disclosed, and they typically disclose holdings on a daily basis, so you can understand what you're investing in. This is similar to the transparency of mutual funds, although mutual funds usually disclose holdings only on a monthly or quarterly basis; yet both are more transparent than some other vehicles like hedge funds. ## Risks of investing in ETFs While ETFs offer several benefits, there are also several risks to watch out for, such as: ### Market risk Like with any tradable asset, the value of ETFs can fluctuate based on what's happening with the overall market. You might invest in a well-managed ETF, but if investors are selling the declining stocks of the companies that the ETF invests in, then the ETF will generally follow suit in losing value. Also, some more exotic ETFs use leverage or short stocks (or gain short exposure through assets like derivatives), which can amplify losses more than if you invested directly in the underlying stocks. ### Tracking error/tracking difference Because ETFs are tradable securities, the price might not always reflect the underlying assets or the benchmark it tracks. It's possible, for example, that high demand for an ETF temporarily drives up the price above what the underlying securities are worth, which could cause the overall returns to slightly lag the benchmark. ### Liquidity risk While the liquidity of ETFs is generally seen as a positive, there are also some risks to consider. For one, less popular ETFs might not have much trading activity, so the bid/ask spreads could be wide, causing investors to essentially incur higher trading costs that affect net returns. Also, some argue that the intraday liquidity of ETFs makes them susceptible to overtrading, whereas you might feel more capable of taking a set-it-and-forget-it approach with mutual funds. ## Types of ETFs One way of categorizing ETFs is by management style. In that sense, there are two main types of ETFs: index-based ETFs and actively managed ETFs. Index-based ETFs are [passively managed investments](https://www.businessinsider.com/personal-finance/investing/passive-vs-active-investing) and track an index — a grouping of individual assets that share a common feature. For example, the [S\&P 500](https://www.businessinsider.com/personal-finance/investing/what-is-the-sp-500) is an index of the stocks of the 500 largest public companies in the US. Most ETFs are passively managed. Then there are actively managed ETFs, which generally aren't passively following an index. Instead, they often have a benchmark index and a fund manager or team tries to outperform the benchmark by trading assets a little differently than what the index does. One actively managed ETF example might be a fund that includes only certain companies within the S\&P 500, rather than the whole index. Or, the fund manager might frequently buy and sell the stocks of S\&P 500 companies to try to capture an edge, rather than just holding these assets. Generally, you'll pay higher fees for an actively managed ETF. That said, it's possible for an ETF to combine elements of passive and active, such as if a fund follows a custom index. Whether an ETF is passive or active, there can also be some different types of ETFs, such as the following: ### Stock ETFs Stock or equity ETFs often track a specific index of stocks. The index may be based on the companies' size, region, industry, or other commonalities. That said, a stock/equity ETF could be actively managed based on the stocks the fund manager thinks will perform well. ### Bond ETFs Bond or fixed-income ETFs track a portfolio of bonds or similar fixed-income assets, such as corporate and government debt. ### Commodity ETFs Commodity ETFs track the price of raw materials, such as gold or oil, perhaps by using futures contracts or holding physical assets. ### International ETFs International ETFs track companies from a specific country or region. These are often types of equity ETFs, but a bond ETF could also represent a basket of international fixed-income securities. ### Specialty ETFs There are many types of niche or specialty ETFs, such as those that track certain industries or follow investment themes like allocating to [ESG investing](https://www.businessinsider.com/personal-finance/investing/esg-investing) in socially conscious companies. There are now even ETFs that track [cryptocurrency](https://www.businessinsider.com/personal-finance/investing/what-is-cryptocurrency). ## Real ETF examples With the different types of ETFs in mind, here are some real ETF examples: - [SPDR S\&P 500 ETF Trust (SPY)](https://markets.businessinsider.com/etfs/spdr-sp-500-etf-trust-us78462f1030) is one of the first and most popular equity ETFs. It tracks the S\&P 500. - [Invesco QQQ Trust (QQQ)](https://markets.businessinsider.com/etfs/invesco-qqq-trust-us46090e1038) is another popular equity ETF. It tracks the Nasdaq-100 Index, which is made up of the largest non-financial companies on the [Nasdaq stock exchange](https://www.businessinsider.com/personal-finance/investing/what-is-nasdaq). - [Vanguard Total International Stock Index Fund ETF Shares (VXUS)](https://markets.businessinsider.com/etfs/vanguard-total-international-stock-index-fund-etf-shares-us9219097683) is an international equity ETF that tracks the FTSE Global All Cap ex US Index, an index representing a broad range of public companies outside the U.S. - [iShares Global Clean Energy ETF (ICLN)](https://markets.businessinsider.com/etfs/ishares-global-clean-energy-etf-us4642882249) is a sector and thematic ETF that tracks the S\&P Global Clean Energy Index. - [ARK Innovation ETF (ARKK)](https://markets.businessinsider.com/etfs/ark-innovation-etf-us00214q1040) is a large, actively managed ETF that primarily invests in companies that create and use innovative technology. ## How to invest in ETFs Investing in ETFs is typically easy. You can buy and sell ETFs through a brokerage account by simply placing a buy or sell order, just as you would for other stocks. The exact ETFs available can differ by brokerage, but most online brokerage accounts/investing platforms offer ETFs in some capacity. But not all investing apps and brokerages do, so make sure to do your research before signing up. Beginners may have the best luck accessing ETFs with one of the [best robo-advisors](https://www.businessinsider.com/personal-finance/investing/best-robo-advisors) or the [best investment apps for beginners](https://www.businessinsider.com/personal-finance/investing/best-investment-apps-for-beginners). These platforms might serve as a good ETF guide by recommending certain ETFs to you, based on factors like your risk tolerance and investment style. But if you're a more hands-on investor, you can use online screeners and your brokerage's trading function to find ETFs that fit your investment goals. "Every investor should consider ETFs," says Bailey. "They are typically more tax-efficient and lower cost than mutual funds and offer diversification that would be hard to mimic through individual positions." However, complex and high-risk ETFs are also available. Before making an investment decision, consider how the particular ETF could impact your portfolio and how it compares to other types of funds. ## Start investing ## FAQs about ETFs The main difference between ETFs and mutual funds is that an ETF trades on a stock exchange, while a mutual fund only trades via a broker. As such, there are differences, such as ETFs having intraday liquidity. ETFs also often have tax advantages and lower costs. For many investors, ETFs are suitable for long-term, low-cost investing, but it depends on the specific ETF and the investor. A common long-term approach with ETFs is to buy and hold a low-cost ETF that tracks a diversified index like the S\&P 500. An ETF might be better than an individual stock in terms of gaining quick diversification to a broad array of holdings, but the risk/reward can vary, depending on the type of ETF and stock. Yes, many ETFs pay dividends, based on the underlying holdings, such as fixed-income securities or dividend-paying stocks. However, dividend rates vary significantly by fund. The downsides to ETFs depend on the context, but some common negatives include the risk of investment losses, tracking error/tracking difference vs. an index, higher fees than investing directly in stocks (but lower than many mutual funds), and sometimes limited liquidity, which can widen bid/ask spreads. ETFs also might have downsides vs. mutual funds, such as not always enabling fractional investing. [![](https://i.insider.com/652eb00f211def8ed8373e18?crop=1:1&width=256&format=jpeg&auto=webp)](https://www.businessinsider.com/author/jake-safane) Jake Safane is a freelance writer specializing in finance and sustainability. He runs a corporate sustainability blog, [Carbon Neutral Copy](https://carbonneutralcopy.com/), and his work has appeared in publications such as The Economist, CBS MoneyWatch, and the Los Angeles Times.ExperienceJake has been working in financial journalism since 2011, covering areas such as banking and investing for both businesses and individuals. His career has included a mix of in-house reporting jobs at B2B finance publications such as Global Custodian and FundFire, a role in sponsored research at The Economist, and freelance engagements with online publications, financial advisors, and fintech companies.His interest in personal finance dates back to joining his middle school stock trading club, where he learned about markets by doing simulated trading. A high school field trip to the New York Fed further cemented his fascination with the financial system and how seemingly academic concepts can make a big difference in the average person's life.His personal interest in the environment has also carried over into finance, such as by covering ESG and impact investing. He believes that one of the top ways to solve the climate crisis is by helping both businesses and individuals realize the long-term financial benefits that sustainability can bring.In his personal life, he also enjoys playing tennis, going to the gym, and going to the beach with his family — though often just for walks along a paved path, because vacuuming sand trekked in by a toddler and dog really cuts into writing time.ExpertiseJake’s areas of personal finance expertise include: - Investing - Banking - Financial Planning - Retirement - Insurance EducationJake is a graduate of Boston University, where he wrote for The Daily Free Press and had a show on the school's radio station. Read more Read less [![](https://i.insider.com/6494561e65b9ce0018a46b81?crop=1:1&width=256&format=jpeg&auto=webp)](https://www.businessinsider.com/author/tessa-campbell) [Tessa Campbell](https://www.businessinsider.com/author/tessa-campbell) Investing and Retirement Reporter Tessa Campbell was an investing and retirement reporter on Business Insider’s personal finance desk. Over two years of personal finance reporting, Tessa built expertise on a range of financial topics, from the best credit cards to the best retirement savings accounts.ExperienceTessa reported on all things investing — deep-diving into complex financial topics, shedding light on lesser-known investment avenues, and uncovering ways readers can work the system to their advantage.As a personal finance expert in her 20s, Tessa is acutely aware of the impacts time and uncertainty have on your investment decisions. While she curated Business Insider’s guide on the best investment apps, she believed that your financial portfolio does not have to be perfect, it just has to exist. A small investment is better than nothing, and the mistakes you make along the way are a necessary part of the learning process.Expertise: Tessa’s expertise includes: - Credit cards - Investing apps - Retirement savings - Cryptocurrency - The stock market - Retail investing Education: Tessa graduated from Susquehanna University with a creative writing degree and a psychology minor.When she’s not digging into a financial topic, you’ll find Tessa waist-deep in her second cup of coffee. She currently drinks Kitty Town coffee, which blends her love of coffee with her love for her two cats: Keekee and Dumpling. It was a targeted advertisement, and it worked. Read more Read less
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