What is exchange-traded fund (ETF)?

Definition

ETF or Exchange-traded fund enables investors to invest in a sector, industry, or even region by tracking multiple stocks or other securities. It allows investors to track an index, eliminating the need to choose individual stocks.

Understanding ETF

Investors have the option to either invest in individual companies or in multiple companies and securities at the same time. For those who prefer the latter, exchange-traded funds (ETFs) are a great option as they provide the ability to invest in a combination of different stocks or securities. ETFs come in various types and are focused on specific industries, regions, or categories of securities. Some ETFs allow investors to invest in an entire sector or to track a broader market index, without having to choose individual companies. Like stocks, ETFs can be bought or sold easily.

Example

Suppose you consider cybersecurity as a profitable investment, but you are uncertain which particular cybersecurity company to invest in. In that case, you can choose a cybersecurity ETF, which comprises shares of various cybersecurity companies, providing you with diversified investment options in the cybersecurity sector.

Gist

Similar to a smoothie, it’s one thing you can invest in that’s made up of a mix of ingredients. ETFs are available in different asset flavors (i.e., they may track different industries, sectors, or types of companies).