An Exchange Traded Fund (ETF) is a collection of securities that tracks an underlying index. They are not just constrained to stocks and can be made up of a number of different investment products, such as commodities or bonds.
The ETF itself has an associated price that allows them to be easily bought and sold via an exchange (hence the name).
ETF’s enable everyday investors to gain exposure to markets and themes that would otherwise be difficult and costly to achieve on an individual basis.
Take for example the SPDR S&P 500 (SPY), one of the most well-known ETF’s globally as it tracks the S&P 500 Index. For an investor to create their own portfolio that achieves the same goal, they would need to pay transaction costs on acquiring and selling every stock. Acquiring the ETF on the other hand, is a single transaction.
Because ETF Portfolio’s are often made up of a number of different investment products and markets, they have become an increasingly popular solution for investors seeking diversification.