ETF Fundamentals

Exchange-traded funds, known as ETFs for short, are investments that work like hybrids of mutual funds and individual stocks.

ETFs have exploded in popularity in recent years and are now the fastest-growing segment of the investing industry.

ETFs are individual investments that track the performance of an entire index, which is an assortment of various other investments grouped together based on certain criteria. An index can contain a group of virtually any type of investment, whether stocks, bonds, or commodities such gold and silver. When you buy an ETF, you own a fractional stake in all of the investments contained in the index that the ETF tracks. For instance, if you buy an ETF that tracks an index of 500 stocks, you’ll own a tiny slice of each of those stocks without having to buy the individual stocks themselves.

Just like individual stocks, ETFs trade in shares on stock exchanges. Each ETF has a share price that changes throughout the trading day based on the performance of the investments in the index that the ETF tracks. As those investments rise or fall in value, so does the ETF’s share price. To buy or sell an ETF, you need to know its trading symbol and the number of shares that you’d like to buy or sell.

All ETFs have a unique name and a trading symbol, or ticker symbol, that consists of 2–4 letters. Whereas stocks and mutual funds are often referred to by name, ETFs are typically referred to by symbol (or a nickname based on that symbol). For instance, the most popular ETF is the S&P 500® Index Depositary Receipts ETF (symbol: SPY) but is typically referred to as “SPY” or as the “SPDRs” (”spiders”) ETF.

There are hundreds of different ETFs on the market, and many more are constantly being created and introduced. About 10 financial services firms dominate the ETF industry. Most of these firms offer ETFs that track indexes created by other firms, called index providers. Index providers license their indexes to financial services firms for use in creating and marketing ETFs. The firms that sell ETFs to the public are known as ETF families. The table below lists the most popular ETF families and the links to their websites: