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Exchange-traded Fund (ETF)

An exchange-traded fund (ETF) refers to a basket of securities tracking a specific index. Just like companies’ shares, ETFs can also be traded on stock exchanges.

Exchange-traded funds are offered in nearly every possible asset class including traditional investments, stocks, commodities, and currencies, among others. Some of the newer ETFs also allow traders to short the market, use leverage, and avoid certain taxes. 

There are several types of ETFs including index, fixed-income, commodity, sector & industry, foreign market ETFs, and others. Index ETFs are the most common type which was designed to track a particular market index such as S&P 500 and Nasdaq Composite. 

Fixed-income ETFs are meant to track various types of bonds including US Treasury, corporate, municipal bonds, and more. Commodity ETFs, as their name suggests, track the price of popular commodities including gold, corn, and oil. Sector and industry ETFs provide offer traders exposure to a particular industry like technology, healthcare, real estate, and more.

Similar to equities, investors also buy and sell ETFs on a daily basis during regular trading hours. Additionally, ETFs also have their own ticker symbol, and their price data can be easily accessed.  

However, there are some key differences between ETFs and company stocks. For example, the number of outstanding shares of an exchange-traded fund changes much more frequently as new shares and existing shares are regularly issued and redeemed, respectively. Because ETFs can constantly create and redeem shares, their market price is always in line with their underlying assets. 

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Author: Mircea Vasiu Updated: July 17, 2022