ETF (Exchange Trading Fund) Definition

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on January 11, 2021

Define ETF In Simple Terms

An exchange-traded fund, or ETF, is a security that consists of a collection of other securities, such as stocks, that trades openly on the securities market.

ETFs are often tracked using an underlying index, though they can represent investments in a number of industries and sectors.

ETFs are similar to mutual funds in that they are pooled investments. However, they can be bought and sold on an exchange like ordinary stock.

What Does ETF Mean In Finance?

The purpose of ETFs is to allow investors to buy a large number of related but diverse securities in a single transaction to optimize the return on investment.

Some common ETFs are:

  1. Bond ETFs include government and municipal bonds, as well as corporate bonds.
    The most popular are the TLT for Treasury bonds, the MUB for national municipal bonds, the LQD for corporate bonds, and the HYI for high yield corporate bonds.
  2. General Stock market ETFs allow investors to invest in the performance of general stock indices, such as the S&P 500 (SPY), NASDAQ (QQQ), and the Russell 200 small cap index (IWM).
  3. Industry ETFs offer investments in companies within a single industry, such as technology, manufacturing, or utilities.
  4. Commodity ETFs offer investments in commodities like gold (GLD) or crude oil (USO).
  5. Currency ETFs invest in foreign currency such as the British pound (FXB) or the Euro (FXE).

Advantages of ETFs

ETFs have some advantages over trading individual securities.

For example, because they let investors put money into many stocks in a single, convenient transaction, they can aid with portfolio diversification.

For this reason, ETFs have become very popular with investors in recent years.

ETF (Exchange Trading Fund) Definition FAQs

ETF stands for an exchange-traded fund.
An exchange-traded fund, or ETF, is a security that consists of a collection of other securities, such as stocks, that trades openly on the securities market.
The purpose of ETFs is to allow investors to buy a large number of related but diverse securities in a single transaction to optimize the return on investment.
ETFs are similar to mutual funds in that they are pooled investments. However, they can be bought and sold on an exchange like ordinary stock while Mutual Funds can only be bought after market close.