An ETF is a fund that trades on an exchange like a stock. Here is how it works, and what the benefits and risks are.
An ETF, short for exchange-traded fund, is a fund that owns a basket of securities or other assets and trades on an exchange throughout the day. You buy and sell units at the market price, just like a stock.
A regular fund is priced once a day. An ETF has a price that moves in real time while the exchange is open.
Most ETFs track an index, such as the largest companies on Wall Street or on the Oslo Stock Exchange. The fund owns the same securities in roughly the same weights, and the goal is to deliver the index return, not to beat it.
There are also actively managed ETFs, where a manager selects the holdings. This type has grown a lot in recent years.
There are ETFs for stocks, bonds, commodities such as gold and oil, and for specific themes such as technology or clean energy. In the US there are also ETFs for cryptocurrency. In Europe, crypto is usually packaged in a related product called an ETP.
The first ETF appeared in the early 1990s. Today the format is one of the most widely used ways to save and invest, for both individuals and institutions.
ETFs are usually cheap, because most of them track an index and do not need a manager to pick stocks. A single unit gives you diversification across many underlying securities.
They are also transparent. Most ETFs publish their holdings daily, so you know what you own. And you can buy and sell at any time while the exchange is open.
An ETF does not remove market risk. If what the fund owns falls in value, the ETF falls too.
Returns can deviate somewhat from the index, partly because of costs. In small, thinly traded products the gap between the buy and sell price can be large. Products that offer leveraged or inverse exposure are designed for the short term and can lead to large losses over time.