Exchange traded fund (ETF)

Exchange traded funds (ETFs) resemble open-ended mutual funds but are listed on a stock exchange and trade like stock through a brokerage account.

You buy shares of the fund, which in turn owns a portfolio of stocks, bonds, commodities, or other investment products. You can use traditional stock trading techniques, such as buying long, selling short, and using stop orders, limit orders, and margin purchases.

The ETF doesn't redeem shares you wish to sell, as a mutual fund does. Rather, you sell in the secondary market at a price set by supply and demand. ETF prices change throughout the trading day rather than being set at the end of the trading day, as open-end mutual fund prices are.

Each ETF has a net asset value (NAV), which is determined by the total market capitalization of the securities or other products in the portfolio, plus dividends but minus expenses, divided by the number of shares issued by the fund.

The market price and the NAV are rarely the same, but the differences are typically small for the most widely traded conventional ETFs. That's due to a unique process that allows institutional investors to buy or redeem large blocks of shares at the NAV with in-kind baskets of the fund's securities or other products.

Most ETFs are linked to a market index, which determines the fund's portfolio. While the majority of the indexes are traditional, some are described as fundamental. In those indexes, components of the index are identified on the basis of selective criteria, such as their performance, rather than their market capitalization.