Investing Essentials What’s inside an ETF?

You may wonder how exchange-traded funds (ETFs) differ from one another. Here’s what you see if you cut open an ETF.

What is an ETF?

An ETF is a basket of investments that trade as a group on an exchange, similar to a stock. You can buy shares of an ETF the same way that you buy shares of a company. But instead of owning just one investment, you gain exposure to potentially tens or even hundreds of investments – helping you diversify your portfolio with just one trade.

Think of it like a taco: one shell, many ingredients. ETFs have surged in popularity over the last decade. There now are thousands of ETFs offering access to a wide range of investments. But not all ETFs have the same ingredients. So how are the recipes different?

Taking a deeper look at ETFs

Just as most tacos have a shell filled with delicious meats, cheeses and toppings, there are certain ETF characteristics that are consistent throughout the landscape. Most ETFs are exchange-traded, tax efficient and lower in fees and minimums than mutual funds. But when you take a bite, tacos – and ETFs – can be quite different on the inside. It’s important to do your research and make sure that an ETF’s objectives align with your own. Here are some key things to consider before choosing an ETF:

What is the ETF’s benchmark?

Many ETFs are designed to provide a similar exposure to their stated benchmark. That’s a standard by which their performance is judged, typically an index (think the S&P 500 index, which measures how the largest 500 U.S. companies are trading). So understanding what the ETF is targeting is a great place to start.

Is the ETF ‘passive’ or ‘active’?

Passive ETFs aim to track their stated benchmark to deliver a similar return. Active ETFs, on the other hand, are managed by an investment team trying to outperform a stated benchmark. This can lead to performance that can be substantially different than the benchmark (better or worse).

How much will ETFs cost me?

Generally, passive ETFs have lower fees than active ETFs as it’s a more “hands-off” approach to investing that requires less management. With active ETFs, a higher fee pays for the manager to choose investments selectively and for the transaction costs of more frequent trades.

Investing in ETFs with J.P. Morgan

Interested in putting your money to work in ETFs? You can search, filter and find your own ETFs with J.P. Morgan Online Investing. Or you can talk with a J.P. Morgan advisor. Be sure to also consult a tax professional to ensure ETFs are the right investments for you.