An exchange-traded fund (ETF) is a basket of securities that is linked to an underlying index for the purpose of tracking its performance over time. In this sense, it constitutes an exchange traded product or instrument- i.e., it is traded on exchanges as certain shares in the underlying securities. The underlying securities consist of financial instruments such as stocks and bonds. ETF, as a structure, is a type of investment fund that is also an exchange-traded product, i.e., it is traded on stock exchanges and similar venues.
Exchange-traded funds are considered one of the key and instrumental products for individual investors who need to have certain exposure to a market index. ETFs provide a vehicle to achieve an investor’s objectives given the intended exposure and risk-return profile.
ETFs take many forms including:
- Index ETFs.
- Fixed-income ETFs.
- Inverse ETFs.
- Leveraged ETFs.
- Actively managed ETFs.
- Passive ETFs.
- In terms of underlying assets or securities: currency ETFs, commodity ETFs, alternatives ETFs, bond ETFs, stock ETFs, crypto ETFs, REIT ETF, etc.
- In terms of composition style: physical ETFs and synthetic ETFs.
- In terms of size of underlying companies: large cap ETFs and small cap ETFs.
