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What is an ETF?

An exchange traded fund (ETF) is an investment fund that invests in a basket of stocks, bonds, or other assets. ETFs are traded on a stock exchange, just like stocks. Investors are drawn to ETFs because of their low price, tax efficiency and ease of trading.

  • ETFs seek to provide the performance of a specified index, such as the S&P 500, and typically have low fees.
  • Like mutual funds, ETFs offer investors diversified exposure to a portfolio of securities, such as stocks, bonds, commodities and real estate.

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Why are ETFs popular?

  • While investors often associate ETFs with large stock indexes, such as the S&P 500, ETFs provide access to virtually every asset class, sector, region, theme and investment style.
  • ETFs are popular because of their low fees, tax efficiency, liquidity and transparency. Since the first ETF was launched in 1993, the ETF industry has grown substantially, with more than $3 trillion now invested in ETFs.1

What are the benefits of ETFs?

ETFs cost significantly less than comparable active mutual funds — and that savings can add up over time. Other benefits include:

  • Access and liquidity. Because ETFs are traded on stock exchanges, they are easily bought or sold.
  • Transparency. Just like mutual funds, ETFs report performance quarterly and fees daily.
  • Diversification. ETFs provide access to a wide range of investment options, covering a broad range of asset classes, sectors and geographies. They also make it easy to select specific themes or investment styles.

What are the types of ETFs?

Note: Most ETFs seek to track an index.

  • Stock ETFs track a certain stock market index, such as the S&P 500 or NASDAQ.
  • Bond ETFs offer exposure to a wide selection of fixed income instruments.
  • Sector and industry ETFs invest in a particular industry, such as technology, healthcare or financials.
  • Commodity ETFs track the price of a commodity, such as oil, gold or wheat.
  • Style ETFs are devoted to an investment style or market capitalization focus, such as large-cap value or small-cap growth.
  • Alternative ETFs offer exposure to the alternatives asset class and invest in strategies such as real estate, hedge funds and private equity.
  • Foreign market ETFs follow non-U.S. markets, such as the United Kingdom’s FTSE 100 Index or Japan’s Nikkei Index.
  • Actively managed ETFs aim to provide a certain outcome, like maximize income or outperform an index, while most ETFs are designed to track an index.

What is the difference between an ETF and a mutual fund?

Most ETFs are passive investments that aim to match the performance of a certain index, less fees. Many mutual funds, on the other hand, are actively managed by fund managers who seek to outperform market indexes. However, some ETFs are actively managed, and some mutual funds are passively managed. The differences between ETFs and mutual funds mainly include:

  • Trading. Investors buy and sell mutual funds directly from a mutual fund company at the current day’s closing price, also known as the NAV (Net Asset Value). In contrast, ETFs are traded throughout the day at the current market price like a stock, and they may cost slightly more or less than the NAV.
  • Fees. Mutual fund investors may pay transaction fees, which can include sales charges or redemption fees. ETF investors may end up paying brokerage commissions, similar to stock trades.
  • Tax implications. Since most ETFs are index funds, they tend to trade less frequently than most actively managed funds; as a result, they often yield fewer taxable capital gains distributions for investors.

Because ETFs trade on exchanges like stocks, they offer investors potential benefits such as intraday trading, daily transparency of holdings and low fees. On average, iShares ETFs' fees are 1/3 lower than active mutual funds2 and offer tax costs approximately ½ of those of active mutual funds.3

The table below illustrates some of the differences among active and index mutual funds, ETFs and stocks.

 

Active mutual funds

Index mutual funds

ETFs

Stocks

Diversified

 

Traded on an exchange

 

 

Intraday pricing

 

 

Intraday trading

 

 

Management fees

 

Commission fees

 

 

Tax management4

 

 

Index-tracking

 

 

Read more about the similarities and differences between ETFs and mutual funds.

What are some of the myths
surrounding ETFs?

Myth #1: ETFs only track traditional market-weighted indexes like the S&P 500.
Truth: Smart Beta ETFs give investors low-cost access to strategies targeting higher returns or reduced risk, similar to the benefits sought by some actively managed funds. There are also ETFs that hold baskets of assets by sector, such as health care or technology, ETFs that invest by region, and ETFs for the fixed income market.

Myth #2: ETFs pose liquidity risks to the market.
Truth: ETFs generally have greater liquidity, or availability to be quickly bought or sold, than mutual funds. Depending on the composition of the ETF, some ETFs are more liquid than others. For example, ETFs that invest in stocks tend to be more liquid than ETFs that invest in alternatives.

What are the risks associated
with ETFs?

Like mutual funds, ETFs carry investment risk depending on their asset class, strategy and region. Some ETFs are riskier than others. For example, if an ETF focuses on one sector, such as energy or biotechnology, it may undergo more price fluctuations than an ETF that invests across all sectors.

In addition, if you invest in an ETF that holds securities in a currency other than your own, movements in the foreign exchange rate may affect your returns.

How are iShares ETFs different?

iShares is a leading ETF provider, featuring more than 800 ETFs globally and $1.9 trillion in assets under management.5 Clients around the world trust iShares ETFs to build the foundation of their portfolios, pursue specific investment goals and implement market views.

By investing in our iShares Core ETFs, you can diversify your portfolio with broad exposure to key asset classes and markets. iShares Core ETFs can also enable you to invest in specific strategies that might otherwise be difficult or expensive to access.

 


iShares Tools

iShares tools

With our iShares Tools, you can learn more about building an iShares Core portfolio and structuring an iBonds ETF Ladder.