Understanding ETFs

An ETF (exchange-traded fund) is a fund that trades like a stock. Many ETFs track an index (like the S&P 500).

Why ETFs Are Popular

• Diversification in one trade
• Often low fees
• Easy to buy and sell during market hours

Key Concepts

Expense Ratio

The annual fee charged by the fund (e.g., 0.03% per year). Lower is generally better.

Tracking Error

How closely the ETF matches its benchmark index. Small differences happen due to fees and portfolio mechanics.

Liquidity

ETFs have their own trading volume and spreads. Illiquid ETFs can have wider spreads.

Common Risks

1. Sector concentration: A tech ETF is not “diversified” across the whole market.
2. Single-country exposure: Country ETFs can be volatile.
3. Leveraged/inverse ETFs: Designed for short-term trading; can behave unexpectedly long-term.

Summary

ETFs can be excellent building blocks. Focus on broad exposure, low fees, and good liquidity.