What Is an ETF (Exchange-Traded Fund)?

An ETF pools money from many investors and holds a portfolio, often one that follows an index, a sector, a commodity or a bond market. The fund's own shares are listed on an exchange. People buy and sell those shares with other market participants during the trading session, and the price they trade at is a market price that can differ slightly from the value of the fund's holdings.

Unlike conventional mutual funds, ETFs do not usually sell shares directly to retail investors or redeem them from them. Large institutions known as authorized participants create and redeem ETF shares in exchange for baskets of the underlying assets, a mechanism that tends to keep the market price close to the net asset value of the portfolio. Because an ETF is a listed security, its page shows an exchange price, and the quote follows the trading hours of that exchange.

ETFs differ in what they hold and how they replicate it. Some own the underlying securities and others use derivatives, and the fund documents describe the structure, the costs and the risks. A fund that tracks an index is a separate product from the index: the two can differ by fees, cash holdings and timing. ETFs that hold commodities or use derivatives carry risks beyond those of a plain basket of shares, which the prospectus describes.