Insights

What Is an ETF? How Exchange-Traded Funds Work and Their Key Benefits

by Sequoia Financial Group

September 22, 2026

Exchange-traded funds, commonly known as ETFs, have become a widely used way to invest across stocks, bonds, and other assets. But what exactly is an ETF, and why might investors use one?

An exchange-traded fund (ETF) is an investment fund that pools money from multiple investors to invest in a portfolio of securities or other assets. Each ETF share represents an ownership interest in that portfolio. Like mutual funds, ETFs can provide access to a diversified collection of investments. Unlike traditional mutual funds, however, ETF shares trade on stock exchanges throughout the trading day at market-determined prices. ¹

How Do ETFs Work?

ETFs can be designed to pursue many different investment objectives. Some seek to track a particular market index or benchmark, while others are actively managed, with investment professionals selecting holdings in line with the fund’s stated strategy. ²

Depending on its objective, an ETF might hold a broad collection of U.S. stocks, bonds, companies within a particular sector, or investments focused on a specific market segment or geographic region. ²

Individual investors generally buy and sell ETF shares through a brokerage account rather than directly from the fund. Because ETFs trade on exchanges, their prices can change throughout the trading day based on market supply and demand. This differs from traditional mutual funds, which generally transact at their net asset value calculated at the end of each trading day. ¹

Why Are ETFs Used?

ETFs can serve a variety of roles within an investment portfolio. An investor might use an ETF to obtain broad exposure to an asset class, diversify across many securities through a single investment, or target a particular market segment or investment strategy. ^2,3

For example, rather than purchasing shares of numerous companies individually, an investor could use an ETF that holds a basket of stocks to gain exposure to those companies through a single security.

What Are the Key Benefits of ETFs?

Depending on the fund, ETFs may offer several potential benefits:

Diversification: A single ETF can hold many securities, making it possible to spread investment exposure across companies, sectors, asset classes, or markets. ¹
Trading flexibility: Because ETFs trade on exchanges, shares can generally be bought and sold throughout the trading day at current market prices. ¹
Cost efficiency: Some ETFs can provide diversified market exposure at relatively low costs, although expenses vary considerably among funds. ²
Tax efficiency: The structure of some ETFs can result in fewer capital-gains distributions than similarly invested mutual funds. Investors could still owe taxes on distributions and on gains realized when ETF shares are sold. ²
Choice and access: ETFs can provide exposure to a wide range of asset classes, geographic regions, sectors, and investment strategies. ³

What Should Investors Know Before Investing in an ETF?

ETFs, as with all investments, carry risk. Their value can rise or fall along with their underlying investments, and ETF shares may trade above or below the value of the fund’s underlying assets. Investors should also consider a fund’s investment objective, holdings, expenses, bid-ask spread, trading volume, tax treatment, and specific risks before investing. ²

Importantly, not all ETFs are alike. Understanding what an ETF owns, how it is managed, what it costs, and the role it is intended to play can help investors evaluate whether a particular fund is appropriate for their investment strategy.

Sources

U.S. Securities and Exchange Commission, Investor.gov — “Characteristics of Mutual Funds and Exchange-Traded Funds (ETFs) – Investor Bulletin”
https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/characteristics-mutual-funds-exchange-traded-funds
Financial Industry Regulatory Authority (FINRA) — “Exchange-Traded Funds and Products”
https://www.finra.org/investors/investing/investment-products/exchange-traded-funds-and-products
Investment Company Institute — “ETFs and Retail Investors: FAQs”
https://www.ici.org/faqs/faqs_etfs_retail_investors

The views expressed represent the opinion of Sequoia Financial Group. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Sequoia believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sequoia’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. Past performance is not an indication of future results. Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Registration as an investment advisor does not imply a certain level of skill or training.