Investment Jargon: Exchange Traded Fund (ETF)

Exchange Traded Fund (ETF)

An ETF is a fund traded on a stock exchange just like a share. The benefit of being exchange traded is that the fund is extremely liquid. This means that the fund can be bought or sold very quickly while markets are open, and it also means the fund is priced continually during the day so its value is always known. Because it is a fund an ETF can contain any asset class: shares, bonds, commodities, volatility or even multiple asset classes. Almost all ETFs are passive funds whose goal is simply to match an index such as the FTSE 100 or the S&P 500 and to do so as cheaply as possible. The return of a tracker fund and the return of the index it is tracking should ideally be identical. In practice the two are different and this difference is called tracking error.