What is an ETF?
An exchange-traded fund, or ETF, is a pooled investment product registered with the 
Securities and Exchange Commission as an open-end investment company or a unit investment trust. It gathers money from many investors and holds a portfolio of stocks, bonds, money-market instruments, other assets, or some combination of them, and each ETF share represents partial ownership of that portfolio and the income it generates. Unlike a traditional mutual fund, ETF shares trade on a stock exchange throughout the trading day, so an investor buys or sells them through a broker at a market price rather than waiting for the fund to calculate a single end-of-day value. ETFs can offer professional management, diversification, relatively low minimum purchase amounts, and trading liquidity while markets are open, but they are not FDIC-insured or otherwise guaranteed by the government, and an investor can lose some or all of the money put into one.
How an ETF works and how it trades
An ETF's shares are bought and sold on a national securities exchange during market hours, at whatever price the market sets at that moment, which can be slightly above or below the fund's net asset value. This is a structural difference from a mutual fund, whose shares are purchased or redeemed directly from the fund itself at the next calculated net asset value, or NAV, after the order is placed, as Investor.gov explains. Because ETF shares change hands on an exchange between investors, most ordinary buy and sell orders do not require the fund itself to sell off portfolio holdings, which is one reason ETFs can generate fewer taxable capital-gains distributions than a comparable mutual fund, according to Investor.gov's ETF overview. Large financial institutions known as authorized participants create or redeem big blocks of ETF shares, called creation units, by delivering or receiving baskets of the underlying securities, a mechanism the SEC's market participants page situates among the broker-dealers, clearing agencies, and other participants that keep securities markets functioning. Most ETFs relying on the SEC's exemptive rule for the structure must post their full portfolio holdings on their website every business day before trading opens, so the market can price shares against the fund's actual assets, a requirement described in 
SEC staff guidance under Rule 6c-11.
How investors make or lose money
An ETF investor can earn a return three ways: dividend payments passed through from the portfolio, capital-gains distributions when the fund sells appreciated holdings, or an increase in the ETF's market price over what was paid for it, per Investor.gov. Reinvesting those distributions can be more complicated for an ETF than for a mutual fund, since buying additional shares on the open market may involve a brokerage commission. Some ETFs are broadly diversified across an index or sector, while others are narrowly focused or track the price of a single company's stock, a category the SEC labels single-stock ETFs and flags as carrying different, often greater, risk than a diversified fund. Whatever the strategy, past performance never predicts future returns, and products promising higher potential returns generally carry higher risk of loss, a point Investor.gov makes for both ETFs and mutual funds alike.
Costs and disclosure
ETFs deduct fees and expenses directly from fund assets, and those costs are reflected in NAV rather than billed to the investor separately, so even a small difference in expense ratio can meaningfully erode long-term returns, according to the SEC's investor bulletin on mutual fund and ETF fees and expenses. That bulletin also notes that the distribution fees known as 12b-1 fees typically apply to mutual funds rather than ETFs, and that an ETF investor should separately weigh brokerage commissions and any premium or discount between the market price and the underlying NAV, costs a mutual fund investor does not face in the same way. Every SEC-registered ETF must send shareholders a report twice a year, covering the first six months of the fiscal year and the full fiscal year, and that report has to show the dollar and percentage cost of a hypothetical ten-thousand-dollar investment along with performance history, holdings, and any material changes, as laid out in the SEC's updated shareholder report bulletin. Fees generally compound: the SEC's broader fee-impact bulletin illustrates that a hundred-thousand-dollar investment growing four percent a year for twenty years ends up worth roughly two hundred eight thousand dollars at a quarter-point annual fee versus about one hundred seventy-nine thousand dollars at a one-percent fee, which is why comparing costs before investing matters regardless of which product is chosen.
Where ETFs fit among other exchange-traded products
Not every product that trades like an ETF is legally an ETF. The SEC's glossary of exchange-traded products covers a wider category that includes vehicles not registered as investment companies at all, such as trusts holding physical commodities or, more recently, spot crypto assets; a July 2025 SEC staff statement on crypto asset exchange-traded products notes that those trusts fall outside the Investment Company Act framework that governs true ETFs and carry different disclosure requirements and risks, including custody, network, and volatility risks specific to crypto assets. Anyone comparing products should read the specific fund's prospectus and shareholder reports, available through the fund, a broker, or the SEC's EDGAR system, rather than assume all "exchange-traded" products carry the same protections.
For a side-by-side look at costs before choosing among specific funds, the FINRA Fund Analyzer linked from Investor.gov lets an investor compare fees and expenses across up to three ETFs or mutual funds at once.