ETF (Exchange Traded Fund)

Definition

An ETF (Exchange Traded Fund) is a type of investment fund that is traded on stock exchanges, much like an individual stock. * It holds assets such as stocks, commodities, or bonds and generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value, although deviations can occur. * Analogy: Think of it as a "Basket of Stocks." Instead of buying fruit individually, you buy a pre-packed fruit basket.

Key Advantages

• Diversification: Buying one share of an ETF (like an S&P 500 ETF) gives you exposure to 500 different companies instantly. It reduces single-stock risk.
• Liquidity: Unlike mutual funds, which are priced only once at the end of the trading day, ETFs can be bought and sold intraday whenever the market is open.
• Lower Costs: Most ETFs are passively managed (tracking an index), which results in significantly lower expense ratios compared to actively managed mutual funds.

Popular Examples

• SPY / VOO / IVV: Tracks the S&P 500 index. The standard for US market exposure.
• QQQ: Tracks the Nasdaq-100 index. Popular for tech and growth investors.
• GLD: Tracks the price of Gold bullion.

The Shift: Active to Passive

The rise of ETFs represents a massive shift from Active Investing (trying to beat the market) to Passive Investing (trying to match the market). Warren Buffett famously recommended that the average investor should just buy a low-cost S&P 500 ETF.