What Is An ETF?

What Is An ETF?

An ETF is an exchange traded fund that trades on an exchange like a stock but holds a collection of assets that try to mirror a stock index, sector, commodity, bond, currency or investment style. Unlike a mutual fund an ETF can trade any time the stock market is open until it closes and even in the pre-market and after the close unlike a mutual fund that can only be entered and exited at the end of the day.

All ETFs have fluctuating quotes all day as the market goes up and down that allow them to be traded in real time.

They are similar to mutual funds as they can hold a basket of securities but they can be more specific and even tracking only one asset with no diversification. One example is the $GLD SPDR gold shares ETF that tries to track only the commodity gold.

Another popular ETF is the $DIA SPDR Dow Jones Industrial ETF that tracks the performance of the Dow Jones Industrial Index. You can actively trade the DJIA index using this stock. This was a huge innovation in the financial trading world when ETFs were launched as it was a huge short cut versus having to buy all 30 DJIA components to trade the index.

ETFs allow for much lower commission costs and slippage versus trying to buy every stock individually you can just buy an index tracking ETF like $IWM $QQQ $IWB or $SPY etc.

You can also buy an ETF that tracks a specific sector:

$XLB Materials

$XLE Energy

$XLF Financials

$XLI Industrials

$XLK Technology

$XLP Consumer Staples

$XLU Utilities

$XLV Healthcare

$XLY Consumer Discretionary

$IYT Transporation

There are also leveraged ETFs than can move up two or three time the magnitude of the underlying asset it is tracking. If the $SPY S&P 500 ETF moves up +1% on the day then the $SSO ProShares Ultra 2x leveraged S&P 500 ETF moves up +2% and the ProShares UltraPro$UPRO +3x  leveraged S&P 500 index ETF would move up 3%.

There are also inverse ETFs that move in the opposite direction as the underlying asset it is tracking. If the $SPY S&P 500 ETF  goes down -1% the $SH ProShares Short S&P 500 would go up +1%.

ETFs are great trading and investing tools that allow you diversification in a holding without increasing the commission costs or management expense.