Today’s question is, what is an ETF?
What ETF Stands For
ETF stands for Exchange-Traded Fund. An Exchange-Traded Fund is a mutual fund, but what we traditionally think of as a “mutual fund” is called an open-end mutual fund. An ETF is a modern version of it, and structurally it’s a little bit different.
What Makes Them Different
Mainly, what makes it different is that it tracks an index, so it’s more of a passive investing philosophy. You can get very narrow and granular in terms of what indexes to track and creating an overall diversified investment strategy. One of the byproducts of just simply tracking an index, is that the internal costs are very, very low.
ETF vs Mutual Fund
People very often forget that mutual funds have internal costs. That doesn’t necessarily make it bad, but you don’t necessarily see the costs. Compared to a traditional open-end mutual fund, an Exchange-Traded Fund is most often going to have much lower internal expenses, and that’s what makes it modern and in many cases, better. It’s not to say that in no circumstances a traditional open-end mutual fund would be used. I mean, there are certain circumstances where that could possibly make sense over an ETF.