Exchange-traded fund (ETF)

Exchange-traded funds (ETFs) are listed on a stock exchange and trade like stock. You can use traditional stock trading techniques, such as stop orders, limit orders, margin purchases, and short sales when you buy or sell ETFs.

But ETFs also resemble mutual funds in some ways. For example, you buy shares of the fund, which in turn owns a portfolio of stocks.

Each ETF has a net asset value (NAV), which is determined by the total market capitalization of the stocks in the portfolio, plus dividends but minus expenses, divided by the number of shares issued by the fund.

ETF prices change throughout the trading day, in response to supply and demand, rather than just at the end of the trading day as open-end mutual fund prices do.

The market price and the NAV are rarely the same, but the differences are typically small. That's due to a unique process that allows institutional investors to buy or redeem large blocks of shares at the NAV with in-kind baskets of the fund's stocks.