ETFs Explained: A Beginner's Guide to Exchange-Traded Funds

You might be wondering what ETFs are? ETFs are a very unique financial investment instrument that have grown in popularity in the market. Since they are still somewhat new, they are also unknown to many investors. Here are the basics of ETFs and how they work.

What Are They?

An ETF is very similar to an index fund or mutual fund with more flexibility. Those that issue the ETF are institutions that have huge amounts of assets to buy and sell securities. You can buy a share of the ETF and it represents a part of a diversified portfolio.

Many ETFs make it their goal to stay as close as possible to a certain index like the S & P 500. This makes it seem as though they are very similar to index funds in that regard. However, they are different in a few key areas, one of which is flexibility. With an ETF, you can buy and sell the shares just like you would a stock. This gives active investors an option that is similar to a mutual fund with more opportunity to trade.

ETFs will typically have lower fees associated with them when compared to mutual funds as well. They are more passively managed than their mutual fund counterparts.