ETF stands for Exchange Traded Fund. It is similar to a mutual fund in the sense that it is a pooled investment security, which invests in other securities such as equities, bonds and commodities. Some ETFs may also track an index or a particular investment strategy.
An ETF trades on a stock exchange just like stocks, providing plenty of liquidity to investors. This means that investors can buy or sell an ETF any time while the market is open.
The main advantages of investing in an ETF are the diversification it provides and lower costs. It would be more costly for an investor to buy all the different underlying assets of an ETF. Therefore, ETFs are also ideal for smaller investors to help them achieve a great level of diversification. At the same time, simply trading one ETF also reduces transaction costs.
Due to such reasons and others, their popularity has been on the rise.
ETFs available on the market include Passive ETFs, Active ETFs, Bond ETFs, Stock ETFs, Industry/Sector ETFs, Commodity ETFs and Currency ETFs. Some popular ETFs include the SPDR S&P 500 and the iShares Russell 2000.