What is an exchange-traded fund?
An exchange-traded fund (ETF) holds a portfolio under a stated strategy and its units trade on an exchange. Tracking an index does not assure identical returns.
How it works
1. Mandate The prospectus states its index, sector or other strategy and permitted holdings. 2. Trading Units can trade intraday; market price can differ from the fund’s net asset value. 3. Tracking difference Fees, cash holdings and implementation can cause performance to differ from a benchmark. 4. Spread and volume Bid-ask spread and trading costs matter, especially in less liquid ETFs.
Risks and costs
5. Underlying risk Sector or single-country ETFs can be concentrated even though they contain multiple securities. 6. Comparison Review costs, holdings, tracking, market price versus NAV and trading liquidity. 7. Premiums and discounts ETF prices can trade above or below NAV. Market making may narrow the gap but does not remove spread and liquidity costs.