What’s an ETF?

An exchange-traded fund or ETF is an investment vehicle that holds a diversified basket of assets, such as stocks, bonds, or commodities, and trades on an exchange like a stock. ETFs are designed to track the performance of a specific index, sector, or theme, making them a popular choice for investors seeking low-cost diversification.

How ETFs Differ from other Investment Vehicles

Feature	ETF	Mutual Fund	Individual Stocks
Trading	Trades on an exchange throughout the day.	Bought/sold only at the end-of-day NAV price.	Trades throughout the day on an exchange.
Diversification	Provides exposure to a basket of assets.	Provides exposure to a basket of assets.	Typically, it represents a single company.
Expense Ratios	Generally lower, often below 0.10%.	Typically higher, averaging 0.50%-1.00%.	There is no direct expense ratio, but there may be fees.
Tax Efficiency	More tax-efficient due to in-kind creations/redemptions.	Less tax-efficient; capital gains distributions occur more frequently.	No inherent tax efficiency; depends on trades.
Minimum Investment	Purchase as little as a fraction of one share.	May have high minimums (e.g., $1,000+).	Purchase as little as a fraction of one share.
Management	Passive (index-tracking) or actively managed.	Often actively managed, though index funds exist.	N/A (requires self-management).
Liquidity	High; can be bought/sold anytime during trading hours.	Lower; transactions are processed after market close.	High; trades executed in real-time.

Key Takeaways

• ETFs vs. Mutual Funds: ETFs are more flexible and cost-effective, appealing to individual investors. While offering similar diversification, mutual funds may appeal to those who prefer professional management or invest in retirement accounts where end-of-day trading isn’t a concern.
• ETFs vs. Stocks: ETFs offer diversification and reduced risk compared to individual stocks, which are more volatile and require in-depth analysis.

ETFs bridge the gap between mutual funds and individual stocks, combining the best features for modern investors.

How are ETFs Managed?

As you can see, holding an ETF simplifies building a basket of investments. While the underlying management performed by ETF fund managers saves investors’ time, ETFs also automatically pay fees to the fund manager. You must keep track of the fees you pay. 

The issuing brokerage manages the underlying holdings of an ETF. This means you don’t need to worry about rebalancing if one holding grows too large or another too small. ETFs can be passively managed or actively managed. 

Passively managed ETFs are rebalanced quarterly to address portfolio drift from the benchmark index. Assets rarely shift between the quarterly rebalancing unless the fund’s benchmark index changes. Contrast this with actively managed funds, where investment managers can buy and sell holdings anytime.

An example of passive management arises when a company is added to a benchmark index like the S&P 500, and index fund managers will begin accumulating shares on the open market. The same can be said when an asset is removed from an index. Intel was recently removed from the Dow Jones Industrial Average (DJIA). ETF fund managers tracking the DJIA had to sell their entire Intel positions. This rotation of money in and out of investments can skew the price of assets to the upside or downside. It is something to watch if you’re holding individual stocks. Generally, companies added to the S&P 500 often rally up to the date of addition. 

Popular U.S. Equity ETFs

Now that we’ve broached what an ETF is and what to look for, we’d like to introduce you to ETFs tracking popular U.S.-based indices. We have provided the ETF’s ticker, fund’s name, Assets Under Management (AUM), dividend yield, and the overall fund expense ratio. 

U.S. Stock ETFs

This section will look at stock-based ETFs that track popular U.S. equity markets. 

U.S. Bond ETFs

This section will look at bond-based ETFs that track popular U.S. bond markets.