ETF stands for Exchange-Traded Fund. It’s a type of security which goal is to replicate the performance of indexes, commodities, bonds, and even hedge funds. But unlike mutual funds, an ETF is traded like a common stock, which enables this financial product to have a high liquidity. Also, ETFs typically have lower fees than mutual fund, making it attractive to individual investors.
ETFs have gained a lot of interest in the past few years because it gives the opportunity to individual investors to have access to a highly diversified portfolio without having to buy 100+ shares or to enter a mutual fund that imposes a high fee for the maintenance of the fund. For example, the Vanguard Total Stock Market ETF (or VTI) seeks to track the performance of the CRSP US Total Market Index, which is an Index that follows the performance of nearly 100% of the U.S. investable equity market and has nearly 4,000 constituents. Thanks to this ETF, you have access to an extremely broad diversification without having to buy thousands of American shares.
Furthermore, unlike actively managed funds, ETFs like the VTI are passively managed, which keeps the expenses low and minimize the tracking error. This strategy enables Vanguard to impose only a small expense ratio on the owner of its ETS, and in the case of the VTI, the expense ratio is only 0,04%.
Long story short, it’s a tool that gives you access to nearly every corner of the financial world. There exists ETFs that track specific industries such as energy companies, or the biotech sector. There is also commodities ETFs that track the price of gold, silver, and crude oil among others. And all that at a low cost and the simplicity of a common stock.
Don’t get your performance eaten by management fees. Invest in ETFs.