ETFs and stocks trade side by side
Believe it or not, asking to define ETF stock is a trick question: It doesn’t exist. In spite of its popularity as a search term, there is no such thing as an ETF stock. The common use of the term is probably a case of people inventing shorthand to express what is similar in the two investments, even though there is no crossover.
What is real is that ETFs are one of the newest innovations for investing in stocks. They help people by making it easier to have a diversified portfolio of stocks.
Back to the dictionary
ETF stands for exchange-traded fund. As a fund, think of it as a bundle that contains many stocks — not just one. When you buy an ETF, you are not buying a stock. Stocks are securities that represent a share of ownership in one company. An ETF contains many stocks (or bonds or other investments), but stocks cannot be made up of multiple ETFs.
Together on the exchange
The confusion is probably rooted in the fact ETFs and stocks trade side by side on stock exchanges like the NYSE or Nasdaq. Open-end mutual funds, which are another type of investment fund, do not trade on exchanges.
How ETFs and stocks live side by side on a stock exchange.
Why is trading on an exchange important? For a few reasons.
- Small investment amounts. With an ETF, as with a stock, you can buy as little as one share if you do not have a lot of money to invest. While one share might not be practical or worthwhile, the point is that ETFs can provide investment diversification in valuable assets even for small investors.
- Ease of access. Securities that trade on an exchange are also open for buying and selling through brokerage accounts. It’s easy for anyone to have access to hundreds of ETFs and stocks on exchanges through brokerages. You might pay a brokerage fee to trade ETF shares at any time of the trading day, between 9:30 a.m. and 4:00 p.m. Eastern Time.
- Pricing. Exchanges are intended for buying and selling, and that process means that prices may change frequently every day, as buyers and sellers negotiate. Individual stocks are part of this process, and so are ETFs. ETF prices are recalculated as quickly as possible after the prices change for the stocks they own.
Stocks and ETFs
Trading on stock exchanges is as old as the United States itself. Although companies come and go, the stock exchange has been home to many of the large, leading companies that play a big role in the U.S. economy. For generations, people have invested in stocks to build wealth. While there is a risk of losing money, the stock market has historically increased in value over time. Many stocks also pay dividends, which can be a source of current income.
As one of the newest innovations for investing in stocks, ETFs have been growing in popularity with investors over the past 10–20 years. They help people invest in stocks while also being diversified across many stocks. The benefit is that, if some of the stocks lose value due to falling profits or other issues, other stocks might do better and help your investment keep growing. Diversification is one of many tools investors can use to reduce the risks associated with one stock.
Given some of the features that ETFs and stocks share, it’s easy to see why ETF stock became shorthand for an attractive investment category.
ETFs and stocks share key features, but are not the same
Did you know 60,500 searches are done for “ETF stock” every month?*
You won’t find “ETF stock” in the dictionary, just like you might not find Bigfoot in the woods. But it doesn’t mean the searches won’t continue.
Learn more about ETFs and active ETFs at Putnam.com.
* Google Ads, average monthly searches 8/2020–7/2021.
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