An exchange-traded fund (ETF) is an investment fund that holds assets such as stocks, commodities, bonds, and foreign currency. An ETF is traded like a stock, throughout the trading day, at fluctuating prices. They often track indexes such as the NASDAQ, S&P 500, Dow Jones, and Russell 2000. Investors in ETFs do not directly own the underlying investments, but instead have an indirect claim and are entitled to a portion of the profits and residual value in case of fund liquidation. Their ownership shares or interest can be readily bought and sold in the secondary market.

ETFs have begun to eclipse mutual funds as a favored investment vehicle because they offer investments beyond just stocks, and because of the fact that ETFs often have lower transaction costs than the average mutual fund.

There are many types of ETFS, including the following:

Stock ETFs – These hold a particular set of equities or stocks and are similar to an index. 

Stock ETFs commonly hold a selection of stocks in a given market sector.

Index ETFs – These ETFs have portfolios that are designed to mimic the performance of a specific stock index, such as the S&P 500 Index. They only make portfolio changes when changes happen in the underlying index.

Bond ETFs – These are specifically invested in bonds or other fixed-income securities.

Commodity ETFs – These ETFs hold physical commodities, such as agricultural goods, natural resources, and precious metals.

Currency ETFs – These are invested in a single currency or a basket of various currencies, and are widely used by investors who wish to gain exposure to the foreign exchange market without using futures or trading the forex market directly. They usually track the most popular international currencies, such as the U.S. dollar, the euro, the British pound, or the Japanese yen.

Inverse ETFs – These are funds built by using various derivatives to gain profits through short selling when there is a decline in the value of broad market indexes.

Leveraged ETFs – These funds mostly consist of financial derivatives that are used to amplify percentage returns. It’s important to note that while leveraged ETFs increase profit potential, they also likewise increase risk.

Real Estate ETFs – These funds invest in real estate investment trusts (REITs), real estate service firms, and real estate development companies.

There are many advantages to investing in an exchange-traded fund, including:

Cost benefits: ETFs usually offer a significantly lower expense ratio than the average mutual fund. This is in part because of their exchange-traded nature, which places typical costs on the brokers or the exchange, in comparison with a mutual fund which must bear the cost in aggregate.

Accessibility to markets: ETFs offer exposure to asset classes that were previously hard for individual investors to access, and provide investors with the possibility to own assets such as emerging markets bonds, gold bullion, or crypto-currencies. Because ETFs can be sold short and used to apply other more sophisticated investment strategies, they represent a broader range of opportunities for investors.

Transparency: Hedge funds and even mutual funds operate in a not-so-transparent manner as compared to ETFs. Hedge funds and mutual funds usually report their holdings only on a quarterly basis. In contrast, ETFs clearly disclose their daily portfolio holdings.

Liquidity: Because they can be bought or sold in secondary markets throughout the day, ETFs are extremely liquid. This is in contrast to mutual funds which can only be bought or sold at their end-of-day closing price.

Tax Efficiency: Generally, ETFs pose a major tax advantage over mutual funds for two main reasons. First, ETFs reduce portfolio turnover and offer the ability to avoid short-term capital gains that incur a higher tax rate. Second, ETFs can overcome rules that prohibit selling and claiming a loss on a security if a very similar security is bought within a 30-day window.

Despite the abovementioned benefits, ETFs encounter some challenges as well. For instance, they provide higher exposure to previously unattended asset classes that could bear risks that equity investors might not be familiar with. Some sophisticated examples such as leveraged ETFs involve complex or unfamiliar portfolio structures, tax treatments, or counterparty risks, which require clear understanding of the underlying assets.

Additionally, ETFs carry transaction costs that should be carefully considered in the process of portfolio creations, such as Bid/Ask spreads and commissions.

As of 2017, there are thousands of ETFs in existence. If you want to know who the largest ETF management companies are, here is a list of the top 10 fund companies ranked by assets under management.

1. BlackRock

2. Vanguard

3. State Street Global Advisors

4. Invesco PowerShares

5. Charles Schwab

6. First Trust

7. WisdomTree

8. Guggenheim

9. VanEck

10. ProShares