Exchange-Traded Funds (ETFs)

An ETF — or exchange-traded fund — is an investment vehicle that lets investors gain diversified exposure to stocks, bonds and other assets.

The performance of an ETF’s investments is tied to a market index — such as the S&P 500 — or a sector of the economy, a basket of commodities or another reference.

The earliest ETFs were designed to track specific U.S. stock indexes. This type of ETF is still common, but newer ETFs may track fixed-income investments or foreign securities, according to the U.S. Securities and Exchange Commission.

Data from Statista shows the global market for ETFs topped $10 trillion in 2021. But global economic uncertainty caused the EFT market to shrink by 29.6% in the first half of 2022, according to the Financial Times.

Before investing in an exchange-traded fund, you should read the fund’s summary prospects as well as its full prospectus. The document will detail the ETF’s principal investment strategies, investment objectives, costs, risks and historical performance.

While there are some similarities between ETFs and mutual funds, they are two completely different investment funds. Both exchange-traded funds and mutual funds typically include publicly traded securities, like stocks, in their investment portfolios.

When choosing from ETFs, mutual funds and stocks for your personal finance investment options, you should consider the minimum investment buy-in, the trading times and the fees associated with executing transactions and holding the asset. These factors vary among each investment option.

Both ETFs and mutual funds offer investors diversified access to an asset class or group of asset classes. However, each has different rules, costs and risks, so it’s important to choose based on your investment style and priorities.

There are two main management types of exchange-traded funds: actively managed ETFs and passively managed ETFs.

There are several different kinds of exchange-traded funds that fall into these two managerial categories. They are designed for different investment strategies, styles and risks.

All investment options come with pros and cons. You should consider the advantages and disadvantages of ETFs before investing in one. You should also compare ETFs to other investment options you are considering.

The qualities of ETFs make them a practical investment for beginners and hands-off investors. Those with little investment money may also find exchange-traded funds their best investment option.

ETFs let you build a diversified portfolio with some of the lowest fees and investment requirements. In addition, ETFs are liquid — allowing investors to quickly pull out of a losing investment.

Trading an exchange-traded fund — meaning buying and selling an ETF — can be done through a variety of brokers —traditional or digital.

To begin investing in an exchange-traded fund, you’ll need to follow a few simple steps.

First, do your research. There are a lot of ETFs to choose from. You’ll want to find the one that works best with your financial situation and goals. You’ll also want to consider your investment objectives and style, including your level of comfort with risk, your desire for income and growth, whether you want an active or passive investment and other matters that are important to you.

When you settle on a fund, you’ll want to find a broker that offers it. You can go in person to a traditional broker or dealer, or you can find an online broker or robo-broker.

Be sure to consider fees and other costs.

Once you’ve shopped around, you’ll need to open a brokerage account with your broker. This will be where your investment will be kept — and where you can monitor, access and invest in it.

Once you have all these steps completed, you can buy the ETF. Be sure to confirm all costs and fees — and if you’re buying online, be sure the purchase goes through.