Exchange-traded fund
A pooled fund whose units are listed and traded on an exchange throughout the session, at whatever price buyers and sellers agree rather than at the fund's own valuation.
Example
A fund whose net asset value is 50.00 may be quoted 50.09 bid and 50.15 offer, so a buyer pays 0.30% above the value of the holdings.
Important
The letters describe how you transact, not what you own or what it costs. Exchange-traded funds range from 500-holding index trackers at five basis points to 28-holding concentrated portfolios at sixty, and the wrapper tells you which only by being read.
Related terms
- Mutual fund — An open-ended pooled fund that transacts directly with its holders: money in creates new units and a redemption cancels them, at one price struck after the market closes each day.
- Net asset value — The stated value of a fund's holdings less its liabilities, usually expressed per unit. In illiquid vehicles it is produced by a valuation process rather than by trading.
- Premium or discount — The gap between an exchange-traded fund's market price and the net asset value of its holdings, expressed as a percentage of that value.
- Creation and redemption — The wholesale mechanism by which large blocks of exchange-traded fund units are issued in exchange for a basket of the underlying securities, or cancelled in exchange for that basket.
Lessons that explain it
All 578 terms in the Investing glossary