An exchange traded fund, or ETF, is a type of pooled investment vehicle that tracks a particular index, sector, commodity, or other asset class. ETFs let you invest in lots of securities all at once, and they often have lower fees than other types of funds. These instruments are typically more liquid than the underlying stocks. ETFs can be managed actively or passively. An actively managed ETF is a form of ETF that has a manager making decisions on the underlying portfolio allocation, while passively managed ETFs mimic the composition of an index as best as possible.
Advantages of ETFs
Easy to trade – You can buy and sell any time of the day, unlike most mutual funds that trade at the end of the day.
Transparency – Most ETFs are required to publish their holdings daily.
More tax efficient – ETFs typically generate a lower level of capital gain distributions relative to actively managed mutual funds.