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What is an ETF?

An ETF is an abbreviation for exchange traded fund, which is similar to a mutual fund in that they are both a group of stocks, bonds or other securities in one investment. The important difference between an ETF and a mutual fund is that an ETF trades on an exchange, like a stock, so the price can change throughout the day when the exchange is open. With a mutual fund, the price, or net asset value, is determined at the end of each business day.

Most ETFs track, or replicate, an index, meaning they hold the same portfolio as the index they track. For example, one of the largest ETFs is the SPDR S&P 500 ETF that invests in the same stocks that make up the S&P 500 Index. The goal of an ETF is to provide investors with a return that matches its index benchmark before fees and expenses.

Both vehicles can offer diversification to your portfolio, and they can also invest in a narrower segment of the market, such as a specific industry or geography.

Jemma Financial Wisdom: ETFs are investment vehicles that track a stock or bond index, providing a potentially cost-efficient and tax-efficient way to invest in the markets.

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