What is an ETF?

Photo by Jason Briscoe on Unsplash

A type of security, an exchange-traded fund (ETF), involves a set of shares, such as stocks, which mostly follow an underlying index, even though they can invest in or use different strategies in any number of industry sectors. Across several aspects, ETFs are similar to mutual funds; hence they are listed during the day on exchanges and ETF shares, much like ordinary stocks.

The SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index, is a well-known example. Many forms of investments may be included in ETFs, including stocks, commodities, shares, or a mixture of investment types. As Marketable security, an ETF has an associated price that allows it to be quickly acquired and sold.

Why is an ETF, ETF?

Since it’s exchanged on an exchange just like stocks, an ETF is called an exchange-traded fund. During the entire trading day, an ETF’s stock’s price will adjust as the shares are purchased and sold on the market. This is unlike mutual funds that are not traded on an exchange and are only traded once a day after closing the markets. Also, as compared to mutual funds, ETFs tend to be more cost-effective and more liquid.

Photo by Vansh Juneja on Unsplash

Holds Multiple Underlying Assets

Unlike a stock that holds just one asset, an ETF is a type of fund with several underlying assets. Thus, ETFs are practical for portfolio diversification since there are several assets within an ETF.

An ETF is capable of owning hundreds or thousands of stocks across different industries or may be isolated from one specific sector or market. Some funds concentrate on U.S. or China offers only, while others have a global view. Banking-focused ETFs, for instance, will include stocks of different banks across the industry.

Diverse ETFs

Different forms of ETFs are available to investors that can be used in an investor’s portfolio for revenue generation, speculation, price rises, and hedge or partially offset risk.

  • Bond ETFs – Include government bonds, corporate bonds, and state and municipal bonds
  • Industry ETFs – Tracks a particular industry such as technology, banking, or the oil and gas sector. 
  • Commodity ETFs – Commodities like crude oil or gold. 
  • Currency ETFs – Foreign currencies like the Singapore and United States dollar. 
  • Inverse ETFs – Profit from stock declines by shorting stocks. Just like selling a stock, short when you expect a decrease a value, and repurchase at a lower price.
  • Crypto ETFs – A cryptocurrency ETF that tracks one or more digital tokens

On a separate note, it is crucial to understand that exchange-traded notes (ETN) are not real ETFs, though they consist of many inverse ETFs. Instead, an ETN is a bond that is traded like a portfolio and backed like a bank.


There are plenty of ETFs in the market, but here are some popular traditional ETFs that have proven to be stable in the charts:

SPDR S&P 500 (SPY)

The SPDR S&P 500 (SPY) is an ETF that tracks the Standard & Poor’s 500 (S&P 500) index by holding a portfolio of stocks in companies included in the S&P 500 index.

Invesco QQQ (QQQ)

Similar to Invesco QQQ (QQQ), Indexes the Nasdaq 100 is an ETF that consists of 100 of the largest nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. And, mainly contain technology stocks.

Commodity ETFs

Commodity ETFs represents commodity markets that include crude oil (USO) and natural gas (UNG)

iShares Russell 2000 (IWM)

The iShares Russell 2000 ETF tracks investment results of an index composed of small-capitalization U.S. Equities.

SPDR Dow Jones Industrial Average (DIA)

DIA is an ETF that represents the 30 stocks of the Dow Jones Industrial Average5.

Physically-Backed ETFs

The SPDR Gold Shares (GLD) and iShares Silver Trust (SLV) hold physical gold and silver bullion in the fund.

Sector ETFs

Sector ETFs is a sector-based ETF that tracks individual industries such as oil (OIH), energy (XLE), financial services (XLF), REITs (IYR), Biotech (BBH)

ETF Pros and Cons 

The main expenditure for ETF would be the operation and management costs of the fund although ETFs generally have lower average costs as investors would only have to perform one transaction to buy and to sell for a multitude of assets. We can trade ETFs through online or offline brokers, even Robo-advisors. For each trade, brokers usually charge a fee, although there are brokers that offer non-commission trading service for low-cost ETFs. 


  • Entry to a variety of stocks spanning different industries 
  • Low percentages of costs and less fees for brokers. 
  • Management of risks by diversification 
  • There are ETFs based on targeted markets


  • Higher fees for actively managed ETFs 
  • Single-industry ETFs restrict diversification 
  • Lack of liquidity impedes transactions

ETF Summarized

  • An ETF is a basket of assets (stocks, commodities, U.S only or international holdings etc) that trade on an exchange, similar to a stock
  • ETF share prices fluctuates as transactions occur throughout the day
  • ETFs incur less broker commission fee as compared to purchasing individual stocks, offering an overall lower expense ratio
Photo by Tetiana SHYSHKINA on Unsplash

Closing Thoughts

Thanks to their many advantages such as low expense ratios, ample liquidity, selection of investment options, diversification, low investment threshold, and so forth, ETFs are perfect for beginners. These features also render ETFs ideal platforms for new traders and investors to employ different trading and investment strategies.

For related articles, read DigiFinex Academy.

You can share this post on

Reletad Post

What Is NFT Real Estate and How Is It Changing the Real Estate Industry?

NFT real estate is virtual property you can purchase on a metaverse platform. 

There are many use cases for NFT real estate but it is most commonly used as a space to socialize, work, and game.

The value of NFT real estate can be affected by its utility, project, and demand. 

Thanks to blockchain technology, the tokenization of real-world assets (such as real estate) has made the industry’s processes more efficient, transparent, and secure.

Arbitrum Project Introduction

From 2020 to now, many public blockchains such BSC, Solana, Polkadot, and Avalanche raced to take over ETH’s users and market. Their advantages on low gas fee and quick transaction time made ETH eager to release effective Layer2 program to expand the capacity. Since Arbitrum was released, its ecosystem grew up rapidly and already owned many mature and popular featured projects on different race tracks.

Polkadot, the King of Cross-chain Explained

What is Polkadot? Polkadot is a heterogeneous blockchain founded by Gavin Wood, former CTO of Ethereum, is an impeccable blockchain project that is perfect in every sense. Its founder, Gavin Wood, is the author of the Ethereum White Paper and the person who knows the defects of Ethereum at heart. Polkadot was founded with the idea to solve Ethereum’s shortcomings and replace it as the “King of the Public Chain”. Read to find out more!

Fil Mooned Right Away After I Sold It. Am I One of the Weak Hands?

“Fil mooned right away after I sold it. I am the weakest hand in the crypto world.” said one of my friend who has been trading cryptocurrency for many years. He is a user during the public sale and bought FIL at the price of $2. After the FIL is unlocked, he sells coins wildly every day. But even so, he still hates the slow process of unlocking, so he directly sold all the publicly purchased Fil at the price of dozens of dollars.

What is EIP-1559? How will it affect Everyday Users? Will it Pump Up ETH Price?

What is EIP-1559? How will it affect Everyday Users? Will it Pump Up ETH Price? The EIP-1559 we will be talking about in this article is an example of Ethereum improvement proposal. This proposal was first put forward in November 2018 by Eric Conner, an ETH developer. It aims to reform the GAS fee bidding system of ETH, so to reduce the cost for users to transfer money on ETH.

DigiFinex Apollo IEO Project HGOLD Token Sale Announcement & Sponsoring Michael Madsen’s Imprint Ceremony in Hollywood

5 rounds of HollyGold Limited Token Sale came to an end smoothly last Friday, Nov 13rd, 2020. Not only was it a successful token sale, its’ results were indicating a positive growth in the project HollyGold. HollyGold has also sponsored Michael Madsen at his celebratory imprint ceremony in Hollywood recently.

%d bloggers like this: