What is an ETF (Exchange-Traded Fund)?

An Exchange-Traded Fund (ETF) is indeed a fund that is traded on stock exchanges and typically holds a diversified portfolio of assets. This means that ETFs can consist of various investment types including stocks, bonds, commodities, or other securities, all contained within a single fund. They offer investors the benefit of diversification because they allow for investment in multiple securities, reducing the risk associated with individual investments.

ETFs are similar to mutual funds in that they pool money from many investors to buy a broad array of assets. However, what distinguishes ETFs is that they are bought and sold on stock exchanges, like individual stocks, which provides flexibility throughout the trading day at market prices that can fluctuate. This trading mechanism allows for better liquidity compared to traditional mutual funds, where transactions are executed at the end of the trading day at the net asset value.

The nature of ETFs allows investors to take advantage of market trends easily and manage their investment strategy more dynamically. Overall, the structure of an ETF combines features of both mutual funds and individual stocks, making it a popular choice among various types of investors.