What is an ETF?

Updated October 10, 2026 · StockSignalCheck

An exchange-traded fund (ETF) is a basket of investments, such as stocks or bonds, that trades on a stock exchange like a single share. Buying one unit of an ETF gives you a small slice of everything the fund holds.

How an ETF works

A fund company creates the ETF and decides what it holds. Many ETFs simply track an index, a list of companies chosen by fixed rules. For example, an S&P 500 ETF holds the roughly 500 large US companies in that index, in about the same proportions. When the index rises or falls, the ETF follows.

ETF units trade throughout the day on an exchange, at a price that moves with the value of the holdings. You buy and sell them through a brokerage account, the same way you would a stock.

Common types of ETFs

Broad market ETFs track a large index such as the S&P 500, the S&P/TSX Composite or a global index.
Sector ETFs focus on one industry, such as technology, banks or energy.
Bond ETFs hold government or corporate bonds.
All-in-one or asset allocation ETFs combine stocks and bonds from many countries in a single fund, rebalanced for you.
Specialty ETFs, such as leveraged or inverse ETFs, use borrowing or derivatives to magnify or reverse daily moves. They're designed for short-term trading and can behave very differently from what beginners expect over longer periods.

ETFs vs individual stocks

	ETF	Single stock
What you own	A slice of many holdings	Part of one company
Diversification	Built in	None on its own
Ongoing cost	Annual fund fee (MER)	None to hold
Research needed	Understand the index and fees	Understand the business

ETFs vs mutual funds

Both pool money from many investors. The main differences are that ETFs trade on an exchange throughout the day, while mutual funds are usually bought and sold once a day at a price set after the market closes. Index-tracking ETFs also tend to have lower annual fees than actively managed mutual funds, though fees vary widely in both.

What an ETF costs

Management expense ratio (MER). This annual fee, shown as a percentage, is taken from the fund's assets. An MER of 0.20% costs about $2 a year for every $1,000 invested. You don't pay it as a bill; it's reflected in the fund's returns.
Trading costs. Your broker may charge a commission to buy or sell, and there's a small gap between the buying and selling price, called the bid-ask spread.
Currency conversion. Buying a US-listed ETF with Canadian dollars usually means paying to convert currency. See how to buy US stocks from Canada.

Risks to know

An ETF is only as diversified as what it holds. A broad index ETF spreads risk widely; a single-sector ETF can fall sharply if that industry struggles.
Market risk remains. If the whole market falls, a fund that tracks it falls too.
Tracking differences. Fees and trading mean an ETF's return will be slightly different from its index.
Complex products. Leveraged, inverse and other specialty ETFs carry extra risks. Read the fund's documents before buying.

Where to find an ETF's details

Every ETF publishes a fact sheet and, in Canada, an ETF Facts document. These show the holdings, MER, index tracked and past performance. You can also see how an ETF's price has trended on StockSignalCheck, for example on the SPY and QQQ pages, or compare them on SPY vs QQQ.

Keep learning

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This guide is for education only. It isn't personalized financial, investment or tax advice, and nothing here is a recommendation to buy or sell any security. Investing involves risk, including the possible loss of your money.