ETF Basics

An exchange-traded fund is a fund that holds a portfolio of securities and trades on a stock exchange like a single stock. One share represents a proportional slice of everything the fund owns.

ETF shares trade on an exchange throughout the day at market prices, while mutual fund shares are bought from and sold back to the fund once a day at NAV. ETFs generally have no investment minimum beyond one share, and costs, tax handling and share classes differ between the two structures.

NAV is the value of an ETF's holdings, minus its liabilities, divided by the number of shares outstanding. It is calculated once a day after the market closes. The market price of the shares can be slightly above or below NAV during the day.

The expense ratio is the annual cost of running the fund, expressed as a percentage of its assets and deducted from the fund's assets over the year rather than billed separately. A 0.50% expense ratio is $50 a year on a $10,000 investment, before other costs.

The bid is the highest price a buyer is offering and the ask is the lowest price a seller will accept. The difference is the spread, a trading cost paid when you buy and sell. Funds publish a 30-day median bid-ask spread on their websites.

Through a brokerage account, using the fund's ticker, during market hours. The minimum is generally one share, and some brokers offer fractional shares. Limit orders let you set the most you are willing to pay.

Many do. An ETF passes along income from its holdings, such as dividends and interest, as distributions, on a schedule set by the fund, often monthly or quarterly. Distributions are not guaranteed.

Yes. An ETF's value rises and falls with its holdings, and ETFs are not insured or guaranteed. Investments involve risk, including possible loss of principal.