What Is an ETF?

Basically, an ETF lets you own a piece of a whole group of investments without buying each one separately.

Say you wanted to own stock in a bunch of different companies. Instead of seeing every one of those companies as a separate investment in your account, you could own shares of an ETF that holds those stocks. You’d see the ETF in your account, while the individual stocks are held inside the fund.

That’s what ETF stands for: exchange-traded fund. And it’s why an ETF can look a lot like a regular stock when you see one. It has its own price, you can buy shares of it, and it has one of those short letter codes, called a ticker symbol.

But that one ticker can have dozens, hundreds, or even thousands of investments behind it.

What’s Inside Depends on the ETF

Not every ETF holds the same kind of investments. One might hold stock in hundreds of different companies. Another might focus on a particular industry, type of company, country, or group of bonds. Some are much more narrowly focused.

So two ETFs sitting next to each other in the same account can represent very different things, even though both appear as a single investment with one ticker and one price.

The Investments Inside Affect What the ETF Is Worth

Although an ETF has its own share price, the investments inside the fund matter to its value.

If an ETF holds stocks and those stocks rise or fall in value, the value of what the fund owns changes with them. The ETF’s market price can also move during the trading day as its shares are bought and sold.

That’s why two ETFs don’t necessarily move the same way. An ETF holding stocks from hundreds of U.S. companies isn’t holding the same investments as one focused on technology companies or a collection of bonds. What you see in your account is the ETF, but what’s inside it plays a big part in what that ETF is worth.

An ETF Isn’t Quite the Same as a Mutual Fund

ETFs and mutual funds can both hold collections of investments, so they can sound very similar. One of the main differences is how their shares are bought and sold.

ETF shares trade on an exchange during the day, much like individual stocks. Their market prices can change while the market is open.

Traditional mutual funds don’t trade that way. Their shares are generally bought or sold at a price based on the fund’s value that is calculated after the trading day ends.

That difference also helps explain the name exchange-traded fund. It’s a fund because it holds a collection of investments, and it’s exchange-traded because shares of the fund trade on an exchange during the day.

There’s a lot more to ETFs than we could cover here. For a much more detailed look at how ETFs work, Investor.gov has a full guide to exchange-traded funds.