What is an ETF?


Quick Answer

An ETF is an "Exchange Traded Fund," which means it is a fund that tries to replicate the performance of a particular index that it tracks, such as the S&P 500 or Dow Jones. ETFs have existed since the early 1980s.

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Full Answer

One benefit of an ETF is that it provides diversification to a portfolio while still being as simple as trading a single stock. Since the purpose of an ETF is simply to match a particular index, it requires only passive management by the fund manager and therefore has lower administrative costs. ETFs also have an advantage in that they have fewer taxable distributions, such as capital gains, than an actively managed fund would have. Due to lower costs and taxes, more of an investor's dollar is utilized for investment.

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