Exchange-traded fund definition

An exchange-traded fund, or ETF, is an investment fund that holds a basket of assets such as shares, bonds, or commodities and trades on a stock exchange like an ordinary share. It gives you diversified exposure to a whole market or theme through a single instrument.

An ETF usually tracks an underlying index, sector, or asset, and its price moves throughout the trading day as buyers and sellers meet, rather than being set once a day. Most ETFs are passive, aiming to match a benchmark such as the S&P 500 instead of trying to beat it, which keeps their running costs low. Large institutions create and redeem ETF units in the background to keep the fund's market price close to the value of the assets it holds.

An ETF is not the same as a mutual fund, which does not trade intraday and is dealt only at the day's closing net asset value. It also differs from an index: the index is just the benchmark, while the ETF is the tradeable fund that follows it. You can hold an ETF directly, or take position-based exposure to one through a CFD without owning the units.

Exchange-traded fund Example

You want exposure to large US companies without choosing individual shares, so you buy an ETF that tracks the S&P 500. You buy 100 units at $450 each:

100 √ó $450 = $45,000

If the price later rises to $468, your holding is worth $46,800, a gain of $1,800. That single trade gave you exposure to roughly 500 companies at once, spreading your risk across the whole index.