What Is an ETF?
An ETF (exchange-traded fund) is a fund that holds a basket of stocks or bonds and trades on an exchange like a stock. You can buy or sell shares throughout the trading day at the current market price.
ETFs offer instant diversification. Instead of buying 500 stocks, you buy one ETF that holds 500 stocks. You get exposure to an entire market segment with a single trade.
How ETFs Differ From Mutual Funds
| ETF | Mutual fund | |
|---|---|---|
| Trading | Anytime during market hours (9:30 a.m.–4 p.m. ET) | Once per day at closing price |
| Minimum | One share (often $50–250) | Some have $1,000+ minimums |
| Expense ratio | Often very low (0.03–0.15%) | Varies; index funds often low too |
| Tax efficiency | Often more tax-efficient (in-kind redemptions) | Can trigger capital gains when others sell |
For most investors, ETFs are a simple, low-cost way to build a diversified portfolio.
Popular U.S. ETFs for Beginners
- VTI — Vanguard Total Stock Market. Holds nearly all U.S. stocks. ~4,000 companies.
- VOO — Vanguard S&P 500. Tracks the 500 largest U.S. companies.
- VXUS — Vanguard Total International Stock. Non-U.S. stocks. Diversifies beyond America.
- BND — Vanguard Total Bond Market. U.S. bonds.
- VT — Vanguard Total World Stock. Global stocks (U.S. + international) in one fund.
Index vs Actively Managed ETFs
Most of the ETFs above are index funds—they track a market index (like the S&P 500) and charge very low fees. Actively managed ETFs have a manager picking stocks; they cost more and rarely beat the index over the long run. Stick with index ETFs unless you have a specific reason not to.
What to Watch: Expense Ratio
The expense ratio is the annual fee you pay. 0.03% means $3 per $10,000 invested per year. 0.50% means $50. Lower is better. VTI charges about 0.03%—that's about $3 per $10,000. Many funds charge 0.50% or more; over decades, that adds up.
Rule of thumb
For broad market index ETFs, aim for expense ratios under 0.20%. VTI, VOO, VXUS, BND, and VT are all well below that.
What is the main advantage of an ETF like VTI over buying individual stocks?