Exchange-traded funds (ETFs) are securities traded on stock exchanges. They represent a basket of stocks, bonds, funds, derivatives and/or hard assets.
What that means:
An ETF is a type of fund designed to match the overall performance of an index, such as the S&P 500 or the S&P/TSX Composite Index. It is a way to own all of the companies included on the index in a stock-like structure. Unlike a mutual fund, which can only be bought and sold at the end of the day, ETFs are listed on an equity exchange and can be traded at any point. If the index the fund is designed to track rises by 10%, so does the ETF (minus a small fee for the administration of the fund). ETFs are an inexpensive way to participate in the market because of their low fees. While the most popular ETFs follow the most popular indexes, the ETF landscape has grown exponentially over the last decade. You can now buy ETFs that follow specific sectors, such as energy or financials; regions, such as emerging markets, China or Europe; and niche topic areas like robotics and space. You can also purchase a basket of bonds in an ETF structure or buy an ETF that tracks the price of bitcoin or gold.
ETFs can be a flexible and relatively inexpensive method to add diversification to a portfolio.