Summary

ETFs are very popular and useful investment vehicles that offer affordable diversification and professional portfolio management. An ETF is a basket of securities that is designed to ‘mimic’ the performance of an index, sector, or category of securities.

For example, the ETF with ticker SPY is designed to track the performance of the S&P 500, and the company that creates the ETF (in this case Barclays iShares) builds the ETF simply by purchasing the 500 stocks in the S&P 500. Investors can purchase shares of the ETF as a means of gaining instant access to all 500 stocks in the S&P 500, thus tracking its performance.

The main difference between ETFs and mutual funds are that ETFs are not actively managed, they trade intra-day (whereas mutual fund trades settle at the end of the day), and they do not have a goal of outperforming the benchmark. Day traders can use ETFs just as efficiently as stocks or other highly liquid instruments.