What Is an ETF?
Educational only — not financial advice. Updated 2025-11-12.
An exchange-traded fund (ETF) is a diversified basket you buy like a single stock. Low fees and rules-based construction make ETFs a cornerstone for simple portfolios.
Plain-English Definition
An ETF (exchange-traded fund) is a basket of securities you can buy like a single stock. It tracks an index or a rules-based strategy and charges an annual fee called an MER. Most long-term investors use ETFs for diversification and low cost.
How ETFs Are Built (Primary vs Secondary Market)
| Process | What Happens | Why It Matters |
|---|---|---|
| Creation | Authorized participants (APs) deliver a basket of securities to the ETF issuer in exchange for new ETF units. | Helps keep ETF price close to NAV. |
| Redemption | APs return ETF units and receive the underlying basket back. | Prevents big, persistent premiums/discounts. |
| Secondary trading | Investors buy/sell ETF units on an exchange. | Intraday pricing and liquidity for investors. |
ETF vs Mutual Fund (Quick Contrast)
| Feature | ETF | Mutual Fund |
|---|---|---|
| Trading | Intraday, like a stock | Priced once per day |
| Fees (typical index) | Very low MER | Often higher MER |
| Tax efficiency | Generally tax-efficient structure | Can distribute capital gains annually |
| Minimums | One share | Often $500–$1,000+ |
What Do ETFs Hold?
- Broad index ETFs: thousands of stocks globally.
- Bond ETFs: government and corporate bonds across durations.
- Factor/sector ETFs: value, momentum, tech, utilities, etc.
- Asset-allocation ETFs: one-ticker mixes that auto-rebalance (e.g., 60/40).
Costs You’ll Actually Pay
| Cost | Where You See It | Tip |
|---|---|---|
| MER | Baked into daily price | Prefer low MER for long holds |
| Bid–ask spread | At the point of trade | Trade during market hours; use limit orders |
| Commissions | Broker-dependent | Many brokers have low/no ETF commissions |
Simple ETF Portfolio Paths
One-Ticket
- All-in-one equity/bond ETF that auto-rebalances.
- Pick risk level (60/40, 80/20).
Two-Fund
- Equity index ETF + Bond index ETF.
- Rebalance annually or with ±5% bands.
Checklist to Get Started
- Choose your allocation (risk level).
- Pick a low-cost ETF or two.
- Automate contributions.
- Rebalance on schedule.