ETF

What It Means

An ETF (exchange-traded fund) is an investment company that pools money from many investors and puts it into stocks, bonds or other assetsAssetsThings you own that are worth money, such as cash, investments, a home or a car. Your assets minus your debts is your net worth. See more. Its shares trade on national stock exchanges throughout the day at market prices. That market price can land slightly above or below the fund's net asset value (NAV) per share, which is called trading at a premiumInsurance premiumThe amount you pay to keep an insurance plan, such as health insurance, in force, usually monthly, quarterly or yearly, whether or not you use any care. See more or a discount.

How People Say It

• "I can sell the ETF any time the market's open."
• "Watch the spread on the thinly traded ones."
• "Is that a mutual fund or an ETF?"

The Breakdown

Formulas

Bid-ask spread = ask price minus bid price. Premium or discount (%) = (market price minus NAV per share) ÷ NAV per share × 100. A positive result is a premium, and a negative one is a discount.

Worked example. An SEC investor guide uses the example of an ETF quoted at $59.50 bid and $60.00 ask, a spread of 50 cents. Say the fund's NAV per share that moment is $59.80 (our number).

What the result means. The spread is built into the prices you get, so it costs you even when no fee is listed, and the total grows with the number of shares you trade. A premium means you paid more than the holdings behind each share were worth at that moment. The SEC explains that the way ETFs are built, with arbitrage, generally keeps the market price close to the end-of-day NAV.

ETF or mutual fund

Where It Comes From

The SPDR S&P 500 ETF Trust, ticker SPY, was created on January 22, 1993, and launched on the American Stock Exchange that month. State Street, the firm that runs it, describes it as the first US ETF listed on a national stock exchange. Its shares give investors a slice of 500 of the largest US-listed companies, the ones in the S&P 500.

Good to Know

Before you buy, the SEC suggests checkingChecking accountA bank or credit union account for everyday money going in and out, used by debit card, checks, transfers and direct deposit. See more the ETF's website, which posts its NAV, closing market price, closing premium or discount, median bid-ask spread and past premiums and discounts, as of the previous business day. Your broker may charge a commission each time you buy or sell, often a flat fee per trade. If you're looking at a leveraged or inverse ETF, read the SEC's separate bulletin on those first. Like any fund, an ETF can lose value when what it holds falls.

Related Terms and Categories

• Index fund

  A mutual fund or ETF that aims to track the return of a market index, such as the S&P 500, instead of picking investments to beat it.

• Mutual fund

  An SEC-registered fund that pools money from many investors to buy stocks, bonds or other securities, with shares you can sell back to the fund each business day.

• Expense ratio

  The yearly share of a fund's assets used to pay its running costs, so a 0.40% expense ratio costs $40 a year for every $10,000 invested.

• Brokerage account

  An account at a brokerage firm that holds your cash and the stocks, bonds, funds and ETFs you buy and sell through that firm.

• Dollar-cost averaging

  Investing the same dollar amount at regular intervals no matter what prices do, so each payment buys more shares when prices are low and fewer when high.

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