What is an exchange-traded fund?

We explain what ETFs are, how to use them, and how to find the best ones

Karen Wallace 19 November, 2019 | 1:38AM

Vase of flowers

ETFs (or exchange-traded funds) are hybrid investment vehicles that can offer relatively low-cost and tax-efficient exposure to a variety of asset classes and investment strategies. Like traditional mutual funds, most ETFs invest in a diversified portfolio of stocks and bonds. Unlike traditional mutual funds, ETFs trade on a stock exchange. 

The majority of ETFs are passively managed, which means they track an index. That said, a growing minority of them are actively managed. Irrespective of whether they are tracking an index or delivering an active strategy, ETFs tend to have lower annual expenses relative to mutual funds. That said, because they trade like stocks, investors should account for transaction costs (commissions, bid-ask spreads, and so on).  

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Karen Wallace

Karen Wallace  Karen Wallace, CFP® is Morningstar’s director of investor education.