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An exchange-traded fund (ETF) is a type of investment fund that trades like a stock on a stock market and holds a basket of securities, such as stocks, bonds, or commodities. Investors can gain exposure to a broad portfolio of securities by purchasing exchange-traded funds (ETFs), which are created to mimic the performance of a particular index or sector, such as the S&P 500 or the technology sector.
ETFs provide investors with access to a diverse portfolio of securities, much like mutual funds do. While mutual funds are valued at the conclusion of each trading day based on the net asset value of the underlying securities, ETFs are traded on an exchange like stocks and are priced accordingly. Due to their daily disclosure of holdings and lack of sales loads or redemption fees, ETFs also have lower expense ratios and more transparency than mutual funds.
ETFs are a practical and adaptable investing choice since they may be bought and sold at market prices throughout the trading day. Additionally, they give investors access to many other asset classes and investing strategies, such as domestic and foreign equities, fixed income, commodities, and alternative investments.
ETFs have two different types of backing: synthetic and physical. Whereas synthetically backed ETFs utilize derivatives, such as swaps or futures, to mimic the performance of the underlying index, physically backed ETFs actually hold the underlying equities that they track. While some ETFs are meant to provide inverse or short exposure to an index or sector, others use leverage to increase returns.
Since investors want low-cost, diversified investment solutions that can be readily traded and offer exposure to a wide range of asset classes and investment techniques, ETFs have seen a sharp increase in popularity in recent years.
