An ETF is a marketable security that tracks an index, a commodity or a basket of assets like an index funds, but trades like a stock on an exchange. The main difference between ETFs and other types of index funds is that ETFs don’t try to outperform their corresponding index, but simply replicate its performance. By owning an ETF, you get the diversificationof an index fund as well as the ability inherent to stock ownership like selling short and buying on margin. Because of the lack of management and the passive style of the ETF, they are generally considered to be one of the lowest cost investment alternatives. They also do not trade the securities out often, if at all, so there is very little turnover in the security which can make taxation easier to manager.
This type of investment is not suitable for all investors. ETFs will fluctuate with changes in market conditions. In many cases, ETFs have lower expense ratios than comparable index funds. However, since ETFs trade like stocks, they are subject to brokerage fees and trading spreads.