An exchange-traded fund, or ETF, is a group of securities that is traded like a stock. But unlike trading on your own — which requires a solid understanding of how markets work — ETFs are a group affair.
An ETF sponsor, or advisor, curates a basket of stocks and other ETFs. You buy shares of these various baskets of investments like you would buy stock in a company. With a few exceptions, a single security cannot account for more than 25% of any basket.
It’s a good vehicle for beginners who want to dip their toes into the market.
ETFs are advantageous as investment options as they provide greater diversity than a single stock and they have instant liquidity (unlike mutual funds) — see “Is it difficult to withdraw money from an ETF? What about taxes?”. ETFs also meet you where you’re at: You can buy into an ETF with a small initial investment — e.g., $100. You determine your own time horizon, goals, and risk tolerance.
Your investment can be the first step toward meeting the goals that matter most to you, whether you want to multiply college savings, optimize tax benefits, or buy your dream home.
ETFs are liquid — the funds are open-ended, and shares can generally be purchased or redeemed on investor demand.
With an ETF, you generally won't be taxed unless you sell shares at a profit or you earn dividend income, which is possible with some ETFs. There are no penalties for selling ETF shares within any time frame as there might be when selling assets from retirement accounts or shares of certain types of mutual funds.
ETFs are traded when markets are open. Just like a stock, an ETF has a unique ticker symbol and price data can be easily obtained during the course of the trading day. The ETF’s website also lists its held securities; this list is updated daily for most ETFs.
While ETFs first arrived on the scene in 1993, they didn't gain in popularity until after the 2008 recession. In the tumultuous decade that followed, ETFs grew in popularity because of their simple and cost-effective approach to investing and the diversity they provide.
In 2008, U.S. investors had $531 billion in ETFs. But a 2020 SEC rule change eased the approval process for ETFs; more than 500 new ETFs were launched in 2020 and 2021. By the end of 2021, more than $4 trillion in assets were being managed in ETFs.
The process for buying ETFs is very similar to that of buying stocks. To invest in the DIP ETF, you will need a brokerage account with a linked banking account or other source of funding. DIP is traded on NYSE with the ticker symbol “DIP.”