ETF Definition | What Are ETF Funds?

What are ETF funds exactly?  Well, ETF is short for exchange traded funds.  Many consider is one of the best investments you can make.  Let’s start backward and go forward.

First of all, they are funds, in many respects like traditional mutual funds.  ETF funds are baskets of securities that are chosen either by a money manager, team of analysts or a computer software program.

Just like mutual funds, they specialize in specific categories of investments and assets.  If you get a small cap ETF, it will have small companies in it’s basket.

Some even track indices like the S&P 500 composite index, which is called the SPYDR (sounds like “spider”).  You can find one for virtually any major index like the Dow Jones Industrial Average and most of the Russell indices.

You can get a combination of the two as well.  For example, you can invest in a ETF that tracks the Russell 2000 which tracks small cap stocks.

Unlike traditional mutual funds, ETF’s are traded on the open exchange, hence the word “exchange”.  That has two main advantages and very important implications.

First of all, it’s cheap.  All you pay is the trading commission.  That means you skirt the usually high management fees that come with many mutual funds.  You pay the $20 or $10 or whatever your broker charges to buy and sell the ETF.  In fact, many brokers are charging no fees for ETF’s to attract investors to their brokerages.

The other advantage is that you can trade it all throughout the trading day.  With traditional mutual funds, you can invest and divest only once a day, at the end of the trading session.  That means you can’t respond to breaking news and the like.  With ETF’s, you.

So I hope that answers your question of what are ETF funds.  They have many benefits that have attracted millions of investors over the last decade.