ETF 101: What is an Exchange-Traded Fund?

ETFs are investment vehicles you may be hearing a lot about as they become ever more popular with investors. ETFs have been around since the 1990s and by some estimates, the investment vehicle will surpass mutual funds in assets within the next decade.

Just over the past 12 months, more than 250 new ETFs have launched. So what are Exchange-Traded Funds?

- In some ways, they look a lot like mutual funds, holding a pool of investments anyone can own.

- ETFs also mimic an index fund, designed to track an index of commodities, bonds or other assets. Investors get the diversification of an index fund.

- But they are much more flexible, allowing investors to trade them like stocks by buying and selling them on an exchange at any time during market hours.

- ETFs also have low fees and are attractive to some tax conscious investors, since their structure allows capital gains tax to hit less often than traditional mutual funds.

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In conclusion, ETFs offer a way for investors to get inexpensive, tax-efficient access to many sections of the market, without needing specialized knowledge to select individual stocks or bonds. Investors should keep in mind, ETFs are not risk-free. The market sell-off in August exposed some ETFs as their performances dropped with the overall correction.

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