101 What Are Exchange-Traded Funds?
What Are Exchange-Traded Funds?
Like mutual funds, exchange-traded funds (ETFs) are baskets of securities. Like stocks, ETFs trade on an exchange. Unlike regular mutual funds, ETFs can be bought and sold throughout the trading day. They can also be sold short and bought on margin. Anything you might do with a stock, you can do with an ETF.
Things To Know
- Anything you might do with a stock, you can do with an ETF.
- ETFs are largely passively managed.
What kinds of ETFs are out there?
The ETF universe has grown dramatically. As of 2025, there are more than 3,600 ETFs in the U.S. and over 10,000 globally, with assets exceeding $19 trillion globally. ETFs now cover nearly every corner of the market, for example:
- Broad-market ETFs: Examples include SPDR S&P 500 ETF (SPY) and Vanguard Total Stock Market ETF (VTI).
- Sector ETFs: Examples include Select Sector SPDRs for technology, health care, and energy.
- Bond ETFs: They include iShares Core U.S. Aggregate Bond ETF (AGG) and Vanguard Total Bond Market ETF (BND).
- International ETFs: These ETFs cover both developed and emerging markets.
- Thematic ETFs: These focus on trends like artificial intelligence and clean energy.
- Commodity ETFs: These offer exposure to gold, oil, and other raw materials.
- Currency and alternative ETFs: These include crypto-linked products and leveraged/inverse ETFs.
ETFs provide relatively low-cost access to markets that were once the domain of institutional investors.
About management
Most ETFs are passively managed, which means that each tracks a sector-specific, country-specific, broad-market, or other index. For them, a manager isn’t actively choosing which stocks to buy and sell. However, actively managed ETFs have also become mainstream in more recent years.
Why indexing?
Why has indexing been the strategy of choice for ETFs? ETFs rely on an arbitrage mechanism to keep the prices at which they trade roughly in line with the net asset values of their underlying portfolios. For the mechanism to work, potential arbitragers need to have full, timely knowledge of a fund’s holdings. So, many ETFs have chosen the indexed route because active managers rarely disclose their portfolio holdings more frequently than the Securities and Exchange Commission requires (which currently is four times a year).
Although ETFs are largely index-based, more actively managed or enhanced-index ETFs are gaining visibility. Smart-beta and factor ETFs—such as those weighted by dividends, volatility, or ESG criteria—are now a big segment of the market. For example, the WisdomTree ETFs follow indexes that are weighted based upon stock dividend metrics rather than a more-traditional market-cap weighting. WisdomTree’s research shows that a dividend weighting can provide strong returns.
Actively managed ETFs are widely available now
Actively managed ETFs are growing fast. They represent over 6% of ETF assets and attract inflows as investors seek flexibility. These ETFs combine active strategies with the trading convenience of ETFs, making them a popular choice.
