Investment Objective
An ETF starts with a defined objective, such as tracking a market index, sector, asset class, region, or strategy.
INVESTING • ETFs
ETF Investing Guide: How ETFs Work
Understand exchange-traded funds, how ETFs work, their potential benefits and risks, different ETF types, and what to consider before adding an ETF to an investment portfolio.
ETF Basics
Types of ETFs
Risks & Costs
ETF PORTFOLIO
MARKET EXPOSURE
ETF
BASKET
Stocks
Bonds
Sectors
Markets
ETF BASICS
What is an ETF?
An ETF, or exchange-traded fund, is an investment fund that generally holds a collection of securities or other assets. Shares of an ETF can typically be bought and sold on a stock exchange during market hours.
Depending on its objective, an ETF may provide exposure to stocks, bonds, commodities, sectors, countries, market indexes, or specific investment strategies.
Instead of selecting every security individually, an investor can use a single ETF to gain exposure to a broader group of investments. This structure is one reason ETFs are commonly used as part of diversified investment strategies.
Simple idea, broad exposure.
An ETF can combine multiple investments into one exchange-traded fund, depending on its stated objective and portfolio.
HOW ETF INVESTING WORKS
From an investment objective to a tradable fund.
Understanding the basic ETF structure can help investors see how a single fund can provide exposure to a collection of securities.
Portfolio Holdings
The fund holds securities according to its investment methodology and stated objective.
ETF Shares
ETF shares represent an interest in the fund and can generally be traded through a brokerage account.
Market Trading
Investors can generally buy and sell ETF shares during the trading session, subject to market conditions and liquidity.
THE ETF STRUCTURE
One investment can represent a wider basket.
A key feature of many ETFs is their ability to hold multiple securities inside one fund. The exact composition depends on the fund's objective and methodology.
For example, a broad-market ETF may hold shares of many companies, while a bond ETF may hold a portfolio of bonds with different characteristics.
Multiple Holdings One fund can represent a collection of securities.
Defined Strategy Holdings follow the fund's stated investment objective.
Exchange Trading ETF shares can generally trade during market hours.
TYPES OF ETFs
Different ETFs serve different goals.
ETF categories vary based on the assets, markets, sectors, regions or strategies they are designed to follow.
Broad Market ETFs
Designed to provide exposure to a broad group of companies or securities within a market.
Bond ETFs
Hold portfolios of bonds and can provide exposure to different fixed-income markets.
Sector ETFs
Focus on particular industries or sectors rather than the broader market.
International ETFs
Provide exposure to companies or securities from markets outside an investor's home country.
Commodity ETFs
Seek exposure to commodities or commodity-related investments, depending on the fund structure.
Specialized ETFs
Target specific themes, factors, strategies or investment characteristics.
ETF VS STOCKS
ETFs and stocks offer different exposure.
Understanding the structural difference can help investors decide which type of market exposure fits their broader strategy.
Factor
ETF
Individual Stock
Holdings
Can contain multiple securities
Usually represents one company
Diversification
Can provide broader exposure
More concentrated exposure
Trading
Generally trades on an exchange
Generally trades on an exchange
Company-Specific Risk
Can be spread across holdings
Directly linked to the company
POTENTIAL BENEFITS
Why investors consider ETFs.
ETFs offer several structural features that may make them useful within different investment approaches.
Diversification
Many ETFs hold multiple securities, helping investors gain broader exposure through one fund.
Market Access
Investors can access broad markets, sectors, regions and other investment categories through individual ETFs.
Transparency
Many ETFs provide information about their holdings and investment methodology.
Trading Flexibility
ETF shares generally trade during market hours, subject to market conditions and liquidity.
ETF RISKS
ETFs can diversify a portfolio, but they are not risk-free.
The risks of an ETF depend on what it owns, the market it follows and its investment strategy.
Market Risk
If the underlying market falls, an ETF tracking that market can also decline in value.
Tracking Difference
An ETF may not perfectly match the performance of the index or benchmark it seeks to follow.
Liquidity Risk
Trading activity and market conditions can influence the price at which ETF shares can be bought or sold.
Concentration Risk
Narrow ETFs can have significant exposure to a particular sector, theme, country or group of securities.
ETF
COST
ETF COSTS
Understand the cost behind an ETF.
The expense ratio is one factor investors can review when comparing ETFs. It represents certain annual operating expenses of a fund as a percentage of its assets.
Depending on the investment and transaction, investors may also encounter trading costs, bid-ask spreads and other expenses.
Compare more than one number.
Review costs alongside holdings, strategy, risk, liquidity and
portfolio fit.
CHOOSING AN ETF
A practical ETF evaluation framework.
Before investing, look beyond recent performance and understand how the fund fits into your overall investment strategy.
01
Objective
Understand what the ETF is designed to track or achieve.
02
Holdings
Review the securities, sectors, countries and concentration.
03
Costs
Consider expense ratios, spreads and relevant trading costs.
04
Risk
Evaluate volatility, concentration and market exposure.
05
Portfolio Fit
Consider how the ETF complements your existing investments.
06
Time Horizon
Consider whether the fund's risk profile matches your horizon.
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FREQUENTLY ASKED QUESTIONS
Common questions about ETFs.
An ETF, or exchange-traded fund, is an investment fund that generally holds a collection of securities or other assets and whose shares can typically be traded on a stock exchange.
An ETF follows a defined investment objective and holds assets according to its strategy. Investors can generally buy and sell ETF shares through a brokerage account.
Many ETFs hold multiple securities and can therefore provide diversification. However, some ETFs are narrowly focused and may have significant concentration.
Diversification can reduce company-specific concentration risk, but ETFs are not automatically safer. Risk depends on the assets and strategy of the individual ETF.
An expense ratio represents certain annual operating expenses of a fund as a percentage of its assets. It is one factor to consider when comparing ETFs.
Yes. ETF prices can decline when the underlying investments lose value. The amount of risk depends on the assets and strategy of the particular fund.
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