ETF
A basket of securities that trades on an exchange like a single stock. ETFs give instant diversified exposure to an index, sector, or theme.
An exchange-traded fund (ETF) is a pooled investment vehicle that holds a collection of securities — stocks, bonds, commodities, or a mix — and issues shares that trade continuously on an exchange throughout the day.
Most ETFs passively track an index (SPY tracks the S&P 500, QQQ tracks the Nasdaq-100). Others are actively managed, sector-specific, or use leverage. The key advantages over mutual funds: real-time pricing, lower fees, and no minimum investment.
An authorized participant mechanism keeps the ETF price close to its net asset value (NAV) through creation and redemption of share baskets. Large price deviations are arbitraged away quickly, unlike closed-end funds.
Example
SPY (SPDR S&P 500 ETF) holds all 500 S&P 500 stocks in their index weights. Buying one SPY share gives you proportional exposure to all 500 companies. At $500/share, it is far easier than buying each individually.
Related Terms
Dow Jones Industrial Average
A price-weighted index of 30 major US blue-chip companies. The oldest US stock index, widely covered in media but less representative than the S&P 500.
BeginnerNasdaq Composite
A market-cap-weighted index of all ~3,000+ companies listed on the Nasdaq exchange, with heavy weighting toward technology.
BeginnerRelative Strength (vs Index)
How a stock or sector is performing compared to a benchmark index like the S&P 500. Outperforming the index = positive relative strength.
IntermediateS&P 500
A market-cap-weighted index of 500 large US companies. The most widely used benchmark for US stock market performance.
BeginnerSector
A broad grouping of companies with similar business activities. The S&P 500 uses 11 GICS sectors such as Technology, Financials, and Energy.
BeginnerSector Rotation
The movement of institutional money between sectors of the economy as the business cycle evolves. One sector's outperformance often comes at another's expense.
Advanced