An exchange traded fund (ETF) is usually a portfolio of stocks, bonds, or other securities. In that sense they are very similar to mutual funds. An ETF can follow an index of stocks, like the S&P 500 or the commodities index. It can focus on a type of stock like large cap, medium cap, or small cap. It can focus on an industry like banking, housing, technology, energy, or pharmaceuticals. It can also be more narrowly defined, following a single product like the gold and silver ETFs that pretty much follow the daily spot price of those metals.
The big advantage of ETFs is that they can be traded on the stock market just like any stock or other security. They can be bought and sold quickly. There is no minimum amount that has to be invested, as with most mutual funds. Generally, the portfolio is not as actively traded as a lot of mutual funds. The portfolios tend to be more fixed.
Choosing an ETF isn’t much different than choosing an individual stock. You need to decide on your investment goal. Are you looking for a safe investment with a modest return or are you willing to take some risk with the potential of higher returns? How much are you willing to invest in a single ETF?
Most financial advisers will tell you to have a balanced basket of investments. This can include stocks, bonds, money market accounts, mutual funds, ETFs, and cash, in the form of a savings account or CD. ETFs are as easy to trade as any stock but also just as hard to choose. Do your homework and you could be rewarded handsomely.