What is an ETF?

 

Like mutual funds, exchange-traded funds (ETFs) offer the benefits of pooled investing, which include diversification, economies of scale, professional management, and regulation. However, ETFs are unique in that they can be traded throughout the day on an exchange at a market-determined price.

ETFs typically seek to track a benchmark and are often considered an efficient indexing vehicle. While the vast majority of ETFs are index products, actively managed ETFs are becoming available.

Each share of an ETF represents an undivided interest in the underlying assets of the fund. This feature distinguishes ETFs from exchange-traded notes (ETNs), which do not own underlying assets, but rather represent a credit obligation of the issuer, which is typically a bank.

Interested in more advanced ETF topics? Learn more in the Structures, Indexing, Strategies, and Trading sections.

All investing is subject to risk, including possible loss of principal.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling..

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