An ETF (exchange-traded fund) holds a basket of assets like stocks or bonds and trades on an exchange. Learn how ETFs work, their types, and fees.
An ETF (exchange-traded fund) is an investment fund that holds a collection of assets — like stocks or bonds — and trades on a stock exchange, just like a single share. Buying one ETF instantly gives you exposure to many different assets at once, making it one of the most accessible ways to invest.
What is an ETF?
An ETF holds a basket of securities — typically stocks, bonds, or other assets — bundled together into a single fund. When you buy a share of an ETF, you gain proportional exposure to everything that fund holds. This built-in diversification means your investment isn't tied to the performance of any one company or bond.
How do ETFs work?
ETFs trade on a stock exchange throughout the day, just like individual shares, so you can buy or sell at any point during market hours. Most ETFs are designed to track a market index — such as the S&P 500 — meaning they aim to mirror its performance rather than beat it. Because they're not actively managed by a fund manager making daily decisions, they tend to be simpler and more cost-efficient than traditional funds.
What types of ETFs are there?
The most common types are stock ETFs, which hold shares in companies, and bond ETFs, which hold fixed-income securities. Beyond asset class, ETFs also divide into passive ETFs (which track an index) and active ETFs (where a manager makes investment decisions). Understanding how to choose the right ETF for your goals is a useful next step once you know the basics.
ETFs vs index funds and mutual funds
The main practical difference is how and when you can trade them. ETFs trade on an exchange in real time, like a stock. Index funds and mutual funds are priced once at the end of each trading day, and you buy or sell at that end-of-day price. Many index funds and ETFs track the same benchmarks — the key difference is the trading mechanics and, often, the minimum investment required.
What fees do ETFs have?
ETFs charge an expense ratio (also called the TER, or total expense ratio) — a small annual percentage that covers the fund's running costs. It's deducted from the fund's assets automatically, so you won't see it as a separate charge. Typical expense ratios for passive ETFs are low, often between 0.05% and 0.50% per year.