Exchange-traded fund

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An exchange-traded fund (ETF) is a type of investment fund that is also an exchange-traded product, i.e., it is traded on stock exchanges.^[1][2][3] ETFs own financial assets such as stocks, bonds, currencies, debts, futures contracts, and/or commodities such as gold bars. Many ETFs provide some level of diversification compared to owning an individual stock.

An ETF divides ownership of itself into shares that are held by shareholders. Depending on the country, the legal structure of an ETF can be a corporation, trust, open-end management investment company, or unit investment trust.^[4][5] Shareholders indirectly own the assets of the fund and are entitled to a share of the profits, such as interest or dividends, and would be entitled to any residual value if the fund undergoes liquidation. They also receive annual reports. An ETF generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value, although deviations can occur.^[6]

The largest ETFs, which passively track stock market indices, have annual expense ratios as low as 0.03% of the amount invested, although specialty ETFs can have annual fees of 1% or more of the amount invested. These fees are paid to the ETF issuer out of dividends received from the underlying holdings or from the sale of assets.^[7]

In the United States, there is $5.4 trillion invested in equity ETFs and $1.4 trillion invested in fixed-income ETFs. In Europe, there is $1.0 trillion invested in equity ETFs and $0.4 trillion invested in fixed-income ETFs. In Asia, there is $0.9 trillion invested in equity ETFs and $0.1 trillion invested in fixed-income ETFs. In the first quarter of 2023, trading in ETFs accounted for 32% of the total dollar volume of stock market trading in the US, 11% of trading volume in Europe, and 13% of trading volume in Asia.^[8]

In the US, the largest ETF issuers are BlackRock iShares with a 34% market share, Vanguard with a 29% market share, State Street Global Advisors with a 14% market share, Invesco with a 5% market share, and Charles Schwab with a 4% market share.^[9]

ETFs are regulated by governmental bodies (such as the SEC and the CFTC in the United States) and are subject to securities laws (such as the Investment Company Act of 1940 and the Securities Exchange Act of 1934 in the United States).

Closed-end funds are not considered to be ETFs; even though they are funds and are traded on an exchange they do not change the number of shares they have issued, unlike an ETF. Exchange-traded notes are debt instruments that are not exchange-traded funds.