What is an "exchange-traded fund" (ETF)?

An exchange-traded fund (ETF) is best described as a pooled investment that trades on stock exchanges. This means that an ETF aggregates funds from multiple investors to buy a diversified portfolio of assets, such as stocks, bonds, or commodities. What sets ETFs apart is that they are listed and traded on major exchanges like individual stocks, allowing investors to buy or sell them throughout the trading day at market prices.

Investors are attracted to ETFs because they offer liquidity and flexibility while providing diversified exposure to a specific sector, asset class, or investment strategy. Additionally, ETFs typically have lower expense ratios compared to mutual funds, making them a cost-effective investment option.

Understanding the nature of ETFs is crucial, especially in the context of modern investment strategies, where diversification and ease of trading are essential considerations for investors.