What an ETF is
An exchange traded fund holds a basket of securities and issues shares that trade on a stock exchange throughout the day. Most ETFs track an index, such as the S&P 500 or a bond index, though actively managed ETFs also exist. Because they trade like stocks, they can be bought in a single share or a fraction of one, and their price is visible at every moment the market is open.
Compared with a traditional mutual fund, an ETF is usually cheaper, more transparent about its holdings, and more tax efficient in the United States because of the way shares are created and redeemed. The Goat Academy guide to stocks and index funds places ETFs in the wider context of passive investing.
Six criteria for comparing ETFs
- 01Expense ratio. The annual fee as a percentage of assets. On a broad index fund the difference between 0.03% and 0.20% compounds to a meaningful sum over decades.
- 02Tracking difference. How closely the fund's return has matched its index after costs. A fund with a low fee but poor tracking can cost more than one with a higher fee.
- 03Liquidity and spread. Daily trading volume and the gap between bid and ask. Wide spreads are a hidden cost on every purchase and sale.
- 04Holdings and weighting. Two funds tracking the same market can weight companies differently, by market capitalisation, equally, or by a factor such as value or dividend yield.
- 05Structure. Physical funds hold the underlying securities; synthetic funds use derivatives. Some commodity and leveraged funds have structures that behave unexpectedly over long holding periods.
- 06Domicile and tax. Where the fund is registered affects withholding tax on dividends and reporting for investors outside the United States.
The Goat Academy ETF comparison
Goat Academy maintains a comparison of the widely held ETFs across the main asset classes, scored on the criteria above. It is educational material prepared by the Goat Academy team and does not constitute a recommendation of any fund. Request it using the form below and it will be sent to your email address.
Thematic ETFs, including those focused on artificial intelligence, concentrate risk in a single narrative. They belong as a satellite around a diversified core, as discussed in the stocks and index guide.
Key points
What to take from this guide
- 01An ETF trades like a stock and usually holds an index at low cost.
- 02Compare expense ratio, tracking difference, spread, holdings, structure, and domicile.
- 03Low fee is not the same as low cost; tracking and spread matter too.
Goat Academy is an online financial education institution founded by economist and former investment banker Felix Prehn. It is published by Skillset Solutions FZ-LLC.
Goat Academy provides education only. Nothing on this site is financial, investment, or tax advice, and no outcome, return, or income is promised or implied. Trading and investing carry risk, including the loss of capital.
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