What Is an ETF?
6 min read · Updated June 30, 2026
An exchange-traded fund, or ETF, is a basket of investments — often hundreds of stocks — that trades on an exchange like a single stock. Buy one share and you own a slice of everything inside it.
ETFs have become one of the most popular ways to invest because they make instant diversification cheap and simple.
How an ETF works
An ETF holds a collection of assets — stocks, bonds, or commodities — and issues shares that represent a piece of that collection. The most common type tracks an index, such as the S&P 500.
Because it trades on an exchange, you can buy or sell an ETF any time the market is open, at a live price, just like an individual stock.
ETFs vs. mutual funds
ETFs and mutual funds both pool money to buy many investments, but they trade differently. A mutual fund is priced once a day after the market closes, while an ETF trades continuously throughout the day.
ETFs also tend to have lower fees and are generally more tax-efficient, which is a big part of why they have grown so quickly.
Why investors use ETFs
A single S&P 500 ETF gives you exposure to about 500 companies at once, spreading risk across the whole index instead of betting on one stock. This diversification is the main appeal.
There are also ETFs focused on sectors, countries, bonds, or themes, letting investors target a specific slice of the market in one trade.
Frequently asked questions
What is an ETF?
An ETF (exchange-traded fund) is a basket of investments that trades on a stock exchange like a single share. Buying one share gives you a proportional stake in everything the fund holds.
What is the difference between an ETF and a mutual fund?
Both pool money to hold many investments, but ETFs trade throughout the day at live prices, while mutual funds are priced once daily after the close. ETFs typically have lower fees and better tax efficiency.
Are ETFs a good way to diversify?
Yes. A single broad-market ETF can hold hundreds of stocks, spreading risk across many companies at once, which is why ETFs are a popular tool for diversification at low cost.