Featured Financial Term
Exchange Traded Funds (ETFs)
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.
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 outstanding 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.