Exchange Traded Funds (ETFs)

An ETF is similar to a mutual fund in that you are able to buy or sell a pool of assets.  The pools are typically made up of stocks or bonds and are 'passively' managed.  This meaning that they are not managed as a mutual fund would be that is traded in often to try to outperform an index.  An ETF, on the other hand, most often holds all of the stocks of some particular index.  For example, the Standard & Poor's Depository Receipt ETF (known by  the symbol SPY) holds all 500 stocks in the correct proportions to the Standard & Poor's 500 index.

Fees

Since they are passively managed, and the ETF does not have to pay a large team to be constantly monitoring the market and discovering new opportunities, the fee level for an ETF is usually much lower than that of a mutual fund.   Typical management fees run anywhere from 0.20% - 0.80% depending on the index it tracks, who has put the ETF together, and trading volume, among other factors.

Trading

ETFs trade like stocks, not like mutual funds.  While a mutual fund is valued at the end of the trading day, everyday, based on the values of the assets that it holds, an ETF is valued by the supply and demand of the market, just like a stock.  People trade ETFs based on what they think the underlying index is worth and so the ETF will not exactly track the index, though it should stay close.

Since it is traded like a stock, there is normally a trading fee charged by a broker for the purchase or sale of an ETF, so that may add to the cost. In many cases, though, the diversification and other benefits you can get from the ETF may outweigh the cost.  As with any other financial instrument you should consider your own situation and confer with a financial professional before adding ETFs to your portfolio.