What Is an ETF Fund?


Quick Answer

According to About Money, an exchange-traded fund (ETF) is an index-based investment whose performance attempts to match the performance of the corresponding index it tracks. In this way, one only has to buy shares of the exchange-traded fund instead of shares of several different stocks. Exchange-traded funds add diversification to a portfolio and help hedge investment risk.

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Full Answer

As noted by About Money, an exchange-traded fund is composed of many different stocks, so it is like a mutual fund. However, unlike mutual funds, exchange-traded funds are not actively managed and therefore do not incur the same amount of management fees. Additionally, because there is only one transaction involved when selling, there are less capital gains taxes to pay. The primary downside to exchange-traded funds is that overall performance of the fund can be difficult to predict, therefore it is important to research carefully before choosing to invest in a particular fund.

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