What Is an ETF?
Exchange-traded funds (ETFs) have become one of the most popular ways for individuals to invest, thanks to their low costs, flexibility, and simplicity. In 2025, ETFs continue to attract record inflows as investors favor efficient, diversified portfolios that can be traded like individual stocks.
This article breaks down, in simple terms, what an ETF is, how it works, its benefits, and when to choose an ETF over a mutual fund or an S&P 500 index fund.
How ETFs Work
An ETF is a basket of investments—typically stocks, bonds, or commodities—that trades on an exchange just like an individual share of stock. When you buy one share of an ETF, you're buying a tiny slice of every asset held inside the fund.
ETFs:
- Hold diversified baskets of securities
- Trade throughout the day at market prices
- Are available at most brokerages with no minimum investment requirements
- Can track broad markets (like the S&P 500) or specific sectors (like tech or energy)
The first U.S. ETF was SPDR S&P 500 ETF (SPY), launched in 1993. Today, SPY remains hugely popular and, as of today, is trading up roughly 0.55%.
For more detail on ETF structure and trading mechanics, see the overview at Investopedia.
Key Benefits of ETFs
Low Fees
ETFs are well known for low expense ratios. According to Morningstar data cited by CNBC, the average ETF fee in 2024–2025 was 0.42%, compared with 0.57% for mutual funds (CNBC). Many broad index ETFs charge as little as 0.03%–0.14%.
Intraday Trading
Unlike mutual funds—which only trade once per day at the 4 p.m. net asset value (NAV)—ETFs trade all day long, giving investors control over:
- Exact execution prices
- Limit orders
- Stop-loss or stop-limit strategies
Tax Efficiency
ETFs are generally more tax-efficient than mutual funds because of their in‑kind creation/redemption process, which limits capital gains distributions. As explained by J.P. Morgan Asset Management, ETF shareholders typically avoid surprise taxable distributions that can hit mutual fund holders (J.P. Morgan).