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What are Exchange-Traded Funds?
Home » Investing » Exchange Traded Funds ETFs » What are Exchange-Traded Funds?Exchange-traded funds are share-based investment companies that pool investors’ capital and trade on the stock exchange throughout the day at prices determined by the market. Not unlike mutual funds, exchange-traded funds are comprised of various securities, stocks and bonds. Unlike mutual funds, however, exchange-traded funds attempt to imitate a stock market index, rather than actively add or remove stocks. As a result, exchange-traded funds offer investors the diversification advantages of a mutual fund, while also possessing certain advantages of traditional stocks.
Shares in an exchange-traded fund are created when an institutional investor deposits a group of securities into the fund. Institutional investors receive a predetermined number of shares in the fund as a result of the deposit. Those shares may then be sold on a stock exchange or redeemed. Retail investors are allowed to buy exchange-traded funds on a stock exchange, but it is important to note that retail investors can’t redeem their shares in an exchange-traded fund.
Although there are numerous types of exchange-traded funds available, there are two basic types. Equity funds are the most common type of exchange-traded fund, and they generally offer portfolios of standard equity securities. As with equity funds, fixed income funds offer intraday trading on a stock exchange, but the investment portfolios consist of bonds rather than stocks. In both cases retail investors are investing in the performance of a portfolio of either stocks or bonds as a single investment.
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