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Exchange Traded Fund ETF

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Definition of 'Exchange Traded Fund ETF'

An ETF is an Exchange Traded Fund. This is a security that tracks an index, a commodity or some other basket of assets in the same way that an index fund would track the asset. Because the ETF trades like a stock on an exchange its price will vary throughout the day and can be bought and sold like a stock.

Another feature that distinguishes ETFs from mutual funds is that because its stock price fluctuates daily, it does not have a net asset value (NAV).

The advantages of ETFs over mutual funds are:
  • You get the diversification of an index with the ability to
    • sell short
    • buy on margin
    • buy as little as one share.
  • The expense ratio is usually lower than those of the comparable mutual fund.
  • Commissions are the same as any regular order.

One of the most widely known ETFs is called the SPDR (Spiders), which tracks the S&P 500 index and trades under the symbol SPY. Others are the Diamonds (DIA) which tracks the DJIA, and the NASDAQ-100 Index Tracking Stock (QQQQ).

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