What is an ETF and how does it work?

An exchange-traded fund, or ETF, is a pooled investment security that tracks a specific index, sector, commodity, or other asset. Unlike mutual funds, ETFs trade on national stock exchanges throughout the day at fluctuating market prices. They function like individual stocks, allowing investors to buy or sell shares during standard market hours. Most ETFs are passive, meaning they aim to mirror the performance of a benchmark index like the S&P 500. By holding a basket of underlying assets, such as hundreds of individual stocks or bonds, an ETF provides instant diversification. This structure reduces the impact of a single security failing. Investors pay an expense ratio, which is an annual fee expressed as a percentage of the total investment, to cover the management costs of the fund. Authorized participants, typically large financial institutions, manage the creation and redemption process to ensure the ETF price stays close to its net asset value. This mechanism keeps the fund efficient. Trading involves significant risk, as the value of the underlying assets can decline. Investors may lose money, and past performance does not guarantee future results. Always research the specific holdings and fees of a fund before investing.