An Exchange Traded Fund (ETF) is a security based on an index, on commodities, or on a basket of assets. However, ETF’s trade like an individual stock on major stock exchanges.
The price of an ETF changes throughout the day just like a stock as it is bought and sold by investors. ETFs do not have a NAV (Net Asset Value) that is calculated daily like a mutual fund.
ETFs give investors benefits like the diversification of an index fund and the ability to buy on margin, sell short, or own as little as one share.
Another major advantage of ETFs is that the expense ratios associated with the management of the fund are often times lower than those of the average mutual fund.
The first ETF created and the most commonly known is the Standard and Poor’s Depository Receipts, SPDR (SPY), an ETF which tracks the S&P 500 Index.