Definition
A fund that holds a basket of investments, like a mutual fund, but trades on an exchange throughout the day like a stock.
What it means
An exchange-traded fund, or ETF, pools money to hold stocks, bonds or other assets, and its shares trade on a stock exchange at market prices that change during the day. Many ETFs track an index, while others are actively managed or use complex strategies. ETFs often have low expense ratios, and their structure can make them more tax-efficient than many mutual funds in taxable accounts. You buy them through a brokerage account, and the market price can be slightly above or below the value of the fund's holdings. Some ETFs, such as leveraged or inverse funds, are designed for short-term trading and can behave very differently from the index over longer periods, the SEC warns. ETFs are not FDIC-insured and can lose value.
Example
Investing $10,000 in an index ETF with a 0.05% expense ratio costs about $5 a year in fund expenses, compared with about $50 for a 0.50% fund.
Illustrative numbers only. Your situation will differ.