ETFs in One Sentence
An ETF — Exchange-Traded Fund — is a basket of investments that trades on a stock exchange like a single stock.
A basket of investments means instant diversification. Trades on an exchange means you can buy and sell any time the market is open at real-time prices.
What Is Inside an ETF
An ETF can hold almost any type of investment: stocks, bonds, commodities, real estate, or combinations.
The most common ETFs hold stocks that track a market index. An S&P 500 ETF holds shares of all 500 companies in the S&P 500. When you buy one share you effectively own a tiny piece of all 500 companies.
Other ETFs track international markets, bonds, specific sectors, commodities like gold or oil, and dividend stocks.
How ETFs Differ From Mutual Funds
Both pool investor money to hold a diversified portfolio. The key differences are in trading and cost.
Mutual funds are priced once per day after market close. ETFs trade throughout the day at market prices like stocks.
ETFs are generally cheaper. The average index ETF expense ratio is 0.03% to 0.20% per year. Many actively managed mutual funds charge 0.50% to 1.50% or more.
The Cost Advantage
$10,000 invested for 30 years at 8% annual return:
- With 0.05% annual fee: approximately $99,000
- With 1.00% annual fee: approximately $76,000
The 0.95% fee difference costs $23,000 on a $10,000 investment. On larger portfolios the impact scales proportionally.
How to Buy an ETF
ETFs are bought through a brokerage account the same way you buy stocks. Search by ticker symbol. Enter shares or dollar amount. Place the order.
Most major brokerages now offer no commissions on ETF trades, fractional shares, and no account minimums. You can start with as little as $1.
A Simple ETF Portfolio
Most long-term investors need only two or three ETFs:
- One total US market or S&P 500 ETF for domestic exposure
- One international ETF for global diversification
- One bond ETF to reduce volatility near your goal
This three-fund approach gives exposure to thousands of companies across dozens of countries at a combined cost well under 0.20% per year. It beats most professional fund managers over 20-year periods through diversification, low costs, and consistency.