What Is an ETF?
Exchange-traded funds are very similar to mutual funds, except that they trade throughout the day on stock exchanges as if they were stocks. This means you can actually pay more or less than the value of the underlying holdings in the fund.
What Is the Difference Between an ETF and a Mutual Fund?
While mutual funds track indexes, they are actively managed by an investor buying or selling assets within the fund. ETFs are mostly passive and aren’t managed, and they track a specific market index, like the S&P 500, to try and match their performance. With mutual funds, the investor is attempting to beat the market by comparing the performances between the mutual fund and the index they chose to track.
ETF vs. Stock
When you decide to purchase a stock, you are investing in one company. However, when you decide to purchase an ETF, you are buying a whole collection of many different stocks. Investing in stocks is more risky as the value of your investment depends on the company’s performance; therefore, if the company does well, the value of the stock goes up and vice versa. On the other hand, investing in an ETF is less risky as you are less likely to notice the volatility when one stock decreases in value than you would with your singular stock investment.