Index ETF

AAA

DEFINITION of 'Index ETF'

Exchange-traded funds that follow a specific benchmark index as closely as possible. Index ETFs are much like index mutual funds, but whereas the mutual fund shares can only be redeemed at one price daily, the closing net asset value (NAV), index ETFs can be bought and sold throughout the day on exchanges. Through an index ETF, investors get exposure to a large number of securities in a single transaction. Index ETFs can cover U.S. and foreign markets, specific sectors, or a specific class of stock (i.e. small-caps, ADRs, etc.) but all incorporate a passive investment strategy, only making portfolio changes when changes occur in the underlying index.

INVESTOPEDIA EXPLAINS 'Index ETF'

Index ETFs may occasionally trade at slight premiums or discounts to the fund's NAV, but any differences will quickly be ferreted out through arbitrage by institutional investors. In most cases, even the intraday prices will correlate rather precisely to the actual value of the underlying securities. Additional options are available such as leveraged ETFs or short ETFs, which will have a compound or inverse response, respectively, to the underlying index. Index ETFs can be found based on most of the major indexes such as the Dow Jones Industrial Average, the S&P 500 and the Russell 2000.

Costs are comparable to the cheapest no-load index mutual funds as measured by the expense ratio, but investors will typically have to pay standard commission rates for ETF trades. Mutual fund commission rates are typically lower than for exchange-traded securities.

Index ETFs can be set up as either grantor trusts, unit investment trusts (UITs) or open-ended mutual funds, and will have slightly different regulatory guidelines as a result. Most index ETF shares can be traded with limit orders, sold short and purchased on margin.

RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Stock ETF

    A security that tracks a particular set of equities, similar ...
  3. ProShares

    A division of ProFunds Group that manages short and leveraged ...
  4. IPO ETF

    An exchange-traded fund that focuses on stocks that have recently ...
  5. Index Fund

    A type of mutual fund with a portfolio constructed to match or ...
  6. Standard & Poor's 500 Index - S&P ...

    An index of 500 stocks chosen for market size, liquidity and ...
RELATED FAQS
  1. Are there leveraged ETFs that follow the Internet sector?

    No leveraged exchange-traded fund (ETF) tracks the Internet sector. Internet stocks are a high beta part of the technology ... Read Full Answer >>
  2. How do I find mutual funds that track indexes?

    The two best sources for finding index funds are Fidelity Investments and Vanguard.Of the 57 index funds in investment research ... Read Full Answer >>
  3. Can an investor buy leveraged ETFs that track the automotive sector?

    As of 2015, no leveraged exchange-traded funds, or ETFs, track the automotive sector. However, a non-leveraged ETF tracks ... Read Full Answer >>
  4. What risks should I consider taking a short put position?

    The risks to consider before taking a short put position are the odds of sustained weakness in the asset price and a spike ... Read Full Answer >>
  5. What happens if a software glitch fails to execute the strike price I set?

    If you've ever suffered the frustrating experience of having an order not filled or had a strike price fail to execute because ... Read Full Answer >>
  6. In what market situations might a short put be a profitable trade?

    Short puts would be a profitable trade in low-volatility bull markets or range-bound markets. Selling puts is a strategy ... Read Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    Introduction To Fundamentally Weighted Index Investing

    If you believe the market smiles on those who focus on value, growth or income, this vehicle may be for you.
  2. Mutual Funds & ETFs

    6 Popular ETF Types For Your Portfolio

    Exchange traded funds are an extremely popular diversification tool that can protect your portfolio during troubled periods.
  3. Mutual Funds & ETFs

    4 Ways To Use ETFs In Your Portfolio

    To take full advantage of these vehicles, you need to know how they can fulfill certain strategies.
  4. Options & Futures

    Leveraged Investment Showdown

    Margin loans, futures and ETF options can all mean better returns, but which one should you pick?
  5. Mutual Funds & ETFs

    Sharpen Your Portfolio With Intelligent ETFs

    Intelligent ETFs are innovative funds that pursue above-average returns and can be similar to actively managed mutual funds.
  6. Mutual Funds & ETFs

    ETFs: How Did We Live Without Them?

    These funds burst onto the scene in 1993 and have continued to provide new opportunities for investors since.
  7. Mutual Funds & ETFs

    3 Steps To A Profitable ETF Portfolio

    Achieve your investing goals with this simple process.
  8. Options & Futures

    Inverse ETFs Can Lift A Falling Portfolio

    These funds can reduce your exposure to market risk or enhance portfolio performance.
  9. Mutual Funds & ETFs

    Benchmark Your Returns With Indexes

    If your portfolio is always falling short, you may not be making an apples-to-apples comparison.
  10. Mutual Funds & ETFs

    Enhanced Index Funds: Can They Deliver Low-Risk Returns?

    These funds may look appealing. Find out whether they can really live up to all of their promises.

You May Also Like

Hot Definitions
  1. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  2. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  3. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  4. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  5. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  6. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!