Checkpoint 1 of 4

What Are ETFs?

4 min

Exchange-Traded Funds (ETFs) are investment funds that trade on stock exchanges like individual stocks. They hold a basket of securities and offer instant diversification.

The Basics

An ETF is a fund that owns a collection of assets—stocks, bonds, commodities, or a mix. When you buy one share of an ETF, you own a tiny piece of everything inside it. For example, one share of VOO (Vanguard S&P 500 ETF) gives you exposure to all 500 companies in the S&P 500.

How ETFs Work

ETFs trade throughout the day on exchanges at market prices, just like stocks. This is different from mutual funds, which only trade once per day at the closing price. You can buy or sell ETFs anytime the market is open.

Index ETFs vs. Active ETFs

Index ETFs track a specific market index (like the S&P 500 or Total Stock Market). They're passively managed and have very low fees. Active ETFs have managers who pick securities trying to beat the market. They charge higher fees and often underperform index ETFs.

Index ETFs

Track market indexes
Very low fees (0.03%-0.20%)
Passively managed

Active ETFs

Manager picks securities
Higher fees (0.50%-1.00%+)
Try to beat the market

Key Takeaways

ETFs are funds that trade on exchanges and hold baskets of securities
They offer instant diversification with a single purchase
Index ETFs are passively managed and have lower fees than active ETFs

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