ETF (Exchange-Traded Fund)

By Greg Parsons, editor · Updated October 14, 2026

Educational only, not financial advice.

An ETF (exchange-traded fund) is an investment fund that holds a basket of assets, such as stocks or bonds, and trades on a stock exchange throughout the day like an individual stock. When you buy one share of an ETF, you own a small slice of everything the fund holds.

FINRA describes ETFs as the most common type of exchange-traded product (ETP), a wider family that also includes exchange-traded notes (ETNs) and some commodity products. ETFs combine features of mutual funds and ordinary stocks: they pool money like a fund, but they are bought and sold on an exchange like a share.

Why it matters

• A single ETF purchase can give you exposure to hundreds or thousands of underlying securities.
• Many ETFs track an index, so what they hold is set by a published rulebook rather than a manager's day-to-day picks.
• ETFs can be traded any time the market is open. A traditional mutual fund is priced once a day, after the market closes.
• Every ETF has ongoing costs. Check the fee of the specific fund rather than relying on the low-cost reputation.

How an ETF works

Each ETF has a stated objective in its prospectus. Most aim to track a market index, such as a broad stock index or a bond index. Some are actively managed, which means a manager makes the buying and selling decisions within a strategy.

ETF shares are created and redeemed in large blocks by financial firms called authorized participants. These firms deal with the fund directly in what FINRA calls the primary market. Ordinary investors almost never deal with the fund itself. You buy and sell existing shares with other investors on the exchange, through your brokerage account, in the secondary market.

Because of that, an ETF has two prices worth knowing:

• Net asset value (NAV): the value of everything the fund holds, minus its liabilities, divided by the number of shares. It is calculated each day.
• Market price: what buyers and sellers are paying on the exchange right now. It usually stays close to NAV but can move above it (a premium) or below it (a discount), especially in fast markets or in thinly traded funds.

Common types of ETFs

Type	What it holds	Things to watch
Broad equity	Stocks across a whole market or region	Stock market swings; overlap with other funds you own
Sector or country	Stocks in one industry or one country	Less diversified; can move sharply as a group
Bond	Government or corporate bonds	Interest rate risk and credit risk; prices fall when rates rise
Asset allocation	A fixed mix of stock and bond ETFs in one fund	The mix may not match your own risk tolerance
Leveraged or inverse	Derivatives aiming for a multiple or the opposite of daily index moves	FINRA notes these are generally not designed for long holding periods

ETF vs mutual fund

Both are pooled funds, both can lose money, and both charge annual operating expenses. FINRA points to three main differences:

• Pricing: mutual funds trade once a day at NAV. ETF prices change throughout the trading day.
• How you buy: you buy mutual fund units from the fund company or a dealer. You buy ETF shares on an exchange, usually through a brokerage account.
• Taxes (U.S.-listed funds): FINRA notes that with a U.S. ETF you largely decide when a taxable gain happens by choosing when to sell, while a mutual fund can pass along gains when the manager sells holdings. Canadian-listed ETFs work differently: they can and do distribute capital gains, often as reinvested year-end distributions that are still taxable in a non-registered account. This matters in a taxable account, not inside a TFSA or RRSP.

What an ETF costs

The main ongoing cost is the expense ratio, which Canadian funds usually report as the management expense ratio (MER). It is taken out of the fund's assets, so you never see a separate bill. The SEC's investor bulletin on fund fees explains that these costs reduce your return every year you own the fund.

A simple Canadian example: you hold $10,000 in an ETF with a 0.20% MER. The fund's yearly cost to you is about $20. The same $10,000 in a fund with a 1.50% MER costs about $150 a year. The gap repeats every year and applies to whatever the balance becomes, so check the fee early.

Other costs to look for:

• Trading commissions: some brokers charge per trade, some do not.
• Bid-ask spread: the gap between the highest price a buyer will pay and the lowest price a seller will accept. Wider spreads cost more each time you trade.
• Currency conversion: buying a U.S.-listed ETF with Canadian dollars can add a conversion cost at your broker.

FINRA's Fund Analyzer lets you compare the long-run cost of up to three funds side by side.

Main risks

• Market risk: an ETF falls when the assets it holds fall. Diversification spreads risk but does not remove it.
• Tracking error: an index ETF's return can differ from its index because of fees, cash holdings and how it samples the index.
• Liquidity risk: small or niche ETFs may trade rarely, with wide spreads or large premiums and discounts to NAV.
• Structure risk: some products that look like ETFs are ETNs, which are unsecured debt of a bank. If the issuer fails, you can lose money even if the index did fine.

ETFs inside a TFSA or RRSP

The Canada Revenue Agency lists ETFs among the qualified investments a self-directed TFSA can hold. Income and gains earned inside a TFSA are generally tax-free, and RRSP growth is tax-deferred until you withdraw. Holding ETFs in these accounts means the mutual fund vs ETF tax difference above mostly stops mattering.

How beginners use this

Many beginners start with one or two broad, low-cost index ETFs, or a single asset allocation ETF, and add money on a schedule. Before buying any ETF, read its fact sheet or prospectus and check five things: what index or strategy it follows, the MER, how much it trades each day, how wide the spread usually is, and whether it is an ETF or an ETN. Deep dive: ETFs Explained.

Related terms

• Index Fund
• NAV
• Liquidity

Learn more

• ETF Investing Guide
• What Is an ETF?