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Must-know: What is an exchange-traded fund?

Surbhi Jain

Must-know: An overview of the U.S. exchange-traded fund market (Part 1 of 6)

What is an exchange-traded fund?

In this series, we’ll introduce you to the concept of exchange-traded funds (or ETFs), their types, and their benefits. In addition to discussing the advantages of investing in ETFs, this series gives a comprehensive view on the trends and scope of the U.S. ETF market.

Exchange Traded Funds

An exchange traded fund (or ETF) is an investment vehicle that combines attractive features of traditional mutual funds and individual stocks. Like mutual funds, ETFs represent diversified portfolios of securities that track specific industry sectors, geographic regions, commodities, currencies, bonds, or other indexes. Like stocks, they can be bought and sold from your regular investment account throughout the trading day.

In addition to trading flexibility, key ETF benefits include significant cost savings over mutual funds, instant portfolio diversification, tax efficiency, and transparency of cost and holdings. These will be covered in the next part of this series.

Types of ETFs

ETFs have gained tremendous popularity over the years. There are currently close to 1,500 ETFs trading on the U.S. market alone. Given the popularity, the market never fails to bring new players and new types of ETFs every now and then. Recently, JPMorgan (JPM) has entered the ETF space. Launched on June 17, 2014, the JP Morgan Diversified Return Global Equity ETF (JPGE) is the first of three ETFs that the huge bank has put into registration.

ETFs can broadly be categorized as sector and industry ETFs like the Vanguard REIT ETF (VNQ), bond ETFs like the iShares Core Total U.S. Bond Market ETF (AGG) and the iShares Barclays TIPS Bond ETF (TIP), United States market index ETFs, foreign currency ETFs, commodity ETFs, inverse ETFs, leveraged ETFs, and many more.

The next part of this series will discuss the key benefits of investing in ETFs over other types of investments.

Continue to Part 2

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