What's an exchange traded fund, or ETF? Imagine this: it's Friday night and you decide to throw a party. You'll need snacks. Maybe some buffalo wings, a few bags of chips, couple of dips, bottles of soda, and a pack of gum—for fresh clean breath, of course.
But what if you don't have the money to buy everything yourself? Maybe you and your friends could pool your money, buy it all together, and then each own a percentage according to how much you kicked in.
An ETF works just like that. It's simply a bunch of investments packaged together that follows a theme or category—for example the S&P 500—and is bought and sold on an exchange just like a stock. ETFs are sometimes referred to as baskets of securities, and when you buy a share, you get exposure to all of the stocks, bonds, and other investments in it. In the case of your party, think of it as the shopping basket of goodies you and your friends split up between you.