ETFs

Stock trading dictionary: meaning, example and how traders use it.

Last updated: October 17, 2026

Definition: ETFs, or exchange-traded funds, are investment funds that hold a basket of securities such as stocks, bonds or commodities and trade on a stock exchange throughout the day at market prices, just like individual shares.

How ETFs work

An ETF pools investor money into a portfolio that usually tracks an index, such as a broad US stock index, a sector or a bond market. Shares trade on an exchange during the session, so investors can buy or sell at any time with market or limit orders, and see a live price.

Large institutions called authorized participants can create new ETF shares by delivering the underlying securities to the fund, or redeem shares for those securities. This creation and redemption process helps keep the ETF's market price close to its net asset value (NAV) and is one reason many ETFs are tax-efficient.

Types of ETFs

  • Broad market: track large indexes of US or global stocks.
  • Sector and industry: focus on one stock sector, such as technology or energy.
  • Bond ETFs: hold government, corporate or municipal bonds.
  • Commodity ETFs: hold futures or physical metals like gold.
  • Active ETFs: managers choose holdings rather than tracking an index.
  • Leveraged and inverse ETFs: aim for a multiple or the opposite of daily index returns and are designed for short-term use.

ETF cost example

Suppose you invest $10,000 in an ETF with an expense ratio of 0.10%. The annual cost is about $10, deducted gradually from the fund's assets rather than billed to you. A fund charging 0.75% would cost about $75 a year on the same balance. Over long periods, lower fees leave more of the return in your account. Also consider the bid-ask spread: an ETF quoted at $50.00 bid and $50.02 ask costs little to trade, while a thinly traded one with a $0.20 spread costs more each time you buy or sell.

ETFs vs mutual funds

Both pool money into diversified holdings. Mutual funds are priced once a day after the close, and orders are filled at that NAV. ETFs trade continuously at market prices, often have lower expense ratios, and generally have no minimum investment beyond the price of one share, or less where fractional shares are offered. ETFs can also be bought in most brokerage accounts, including an IRA.

ETF risks

An ETF carries the risks of what it holds: a stock ETF falls in a bear market, and a narrow sector ETF is less diversified than a broad one. Thinly traded ETFs may have wide spreads or trade away from NAV during stress, so liquidity matters. Leveraged ETFs can lose value over time in volatile markets even if the index ends flat.

Frequently asked questions

Are ETFs good for beginners?

Broad, low-cost index ETFs are often used by beginners because they offer instant diversification and simple trading, though they still carry market risk.

Do ETFs pay dividends?

Yes. ETFs that hold dividend-paying stocks or interest-paying bonds generally pass that income to shareholders, typically on a monthly or quarterly schedule.

What is the difference between an ETF and an index fund?

An index fund is any fund that tracks an index. Many ETFs are index funds, but index mutual funds trade once a day at NAV, while ETFs trade throughout the day.

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For information only, not investment advice. See the disclaimer.