ETF (exchange-traded fund)

How it works

You buy and sell ETF shares with other investors through a brokerage account rather than directly from the fund. The market price changes throughout the trading day and can sit a little above or below the fund’s net asset value (NAV), the per-share value of its holdings minus what it owes; these gaps are called premiums and discounts. Large trading firms that can swap shares directly with the fund generally keep the price close to NAV.

Owning an ETF means paying the fund’s annual expense ratio, and trading one can add costs of its own: a brokerage commission if your account charges one, plus the bid-ask spread. The bid is the highest price a buyer is offering at that moment; the ask is the lowest price a seller will accept. Heavily traded ETFs typically have narrower spreads.

The ETF label describes how shares trade, not what the fund owns. Some ETFs track a broad index, others follow a narrow slice of the market, and some are actively managed, with an adviser choosing the investments. The prospectus explains the fund’s objective, strategy, risks, and costs, which are the details that matter when comparing it with another fund.

Related terms

Sources and further reading

• Investor.gov: Exchange-traded funds
• Investor.gov: Mutual fund and ETF fees and expenses

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