ETF

In detail

An ETF (exchange-traded fund) holds a basket of assets — stocks, bonds, commodities — and trades on an exchange throughout the day like a single share. Most track an index and publish their holdings daily. The structural differences from a mutual fund are what people are usually asking about. An ETF trades continuously at a market price, while a mutual fund transacts once a day at its closing net asset value. ETFs are generally cheaper, and in the US their creation-and-redemption mechanism makes them more tax-efficient by avoiding many of the capital-gains distributions mutual funds pass through to holders. Not all ETFs are the low-cost index products the category's reputation rests on. Leveraged and inverse ETFs reset daily, so over any period longer than a day their return can diverge sharply from the multiple of the index they advertise — they are trading instruments, not holdings. Thinly traded ETFs can carry wide bid-ask spreads, and a fund's market price can drift from the value of its underlying assets. The wrapper says how something trades; it says nothing about whether what is inside is worth owning.