Exchange-traded fund
lastmod 2025-08-25created 2025-07-213 edits
An exchange-traded fund (ETF), also called an exchange-traded investment trust, is an investment trust (fund) product for trading that can be traded on the stock market. It is an index fund, whose returns are determined by a specific stock index, listed on the securities market. An ETF consists of assets such as stocks, commodities, and bonds, and as it trades it converges toward its net asset value. Most ETFs track an index, such as the S&P 500 or MSCI EAFE. Low trading costs, lower taxes, and stock-like characteristics make it attractive as an investment asset. ETFs are the most popular type of exchange-traded product.
Only authorized participants, such as large institutional investors, actually buy and sell ETFs from the fund manager, creating or redeeming ETFs in large units of tens of thousands of shares. Even if authorized participants want to invest in the ETF over the long term, they generally buy and sell the underlying assets in large units, supply liquidity, and act as market makers in the open market so that the trading price stays close to the net asset value. Individual investors trade ETFs in the secondary market through brokerages.
ETFs follow the valuation method of mutual funds or unit investment trusts, and are similar in tradability to closed-end funds, which fluctuate around their net asset value on trading days and revert to it by the final trading day. Closed-end funds are traded on exchanges, but ETFs are not. ETFs were created in 1993 in the United States and in 1999 in Europe. ETFs were traditionally index funds, but in 2008 the U.S. Securities and Exchange Commission began allowing actively managed funds using ETFs.
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