What is an ETF? 

Exchange-traded funds (ETFs) were first introduced in 1993 and tracked only broad-based indices like the S&P 500. Today, there are a wide variety of ETFs on U.S. exchanges that track a range of sectors, investment styles (e.g., growth, value) and strategies (e.g., leveraged, quantitative).1 The ETF market today is valued at approximately $2.25 trillion.2

ETFs are popular for investors of varying experience, from the self-taught to institutional investors. In some ways, they work much like a mutual fund. Both hold a collection of assets designed to achieve a specific objective.3

However, a mutual fund is typically actively managed by a professional money manager that uses discretion as to which securities it buys and sells on a day-to-day basis. ETFs, on the other hand, aren’t sold directly by fund companies, but are instead listed on an exchange, where shares can be bought or sold by those who have brokerage accounts.4

ETFs can be traded throughout the day, but that convenience also comes at a price – investors pay a brokerage commission when they buy or sell.5

There are fewer trading and management fees with an ETF than a mutual fund because they don’t require active management. Also, because there is less buying and selling, ETFs tend to be more tax efficient, as the investor is less likely to have ongoing capital gains exposure.6

It’s important to consider any investment within the context of your own goals, risk tolerance, investment timeline and the composition of your overall portfolio. You should speak with a qualified financial advisor before making any decisions about your personal situation.

Back to Articles

1Columbia Threadneedle. Summer 2016. “The ABCs of ETFs.” Accessed Aug. 25, 2016.
2ETFGI.com. July 13, 2016.   “ETFGI reports Assets invested in ETFs/ETPs listed in the United States reached a new record high of 2.256 trillion US dollars at the end of June 2016.” Accessed Aug. 25, 2016.
3Columbia Threadneedle. Summer 2016. “The ABCs of ETFs.” Accessed Aug. 25, 2016.
4Ian Salisbury. Money Magazine. June 30, 2015. “What’s the Difference Between an Index Fund, an ETF, and a Mutual Fund?” Accessed Sept. 20, 2016.
5Ibid
6ETFguide. 2016 “ETFs vs. Mutual Funds.” Accessed Sept. 20, 2016.

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