What Is an ETF?

06/24/2025

Exchange-traded funds (ETFs) have surged back into the spotlight in recent years, gaining popularity among both individual and institutional investors thanks to their low costs, diversification benefits, and flexibility in a volatile market environment.

An ETF is a single investment that holds a basket of different stocks (or sometimes bonds and other assets), and its shares are traded on a stock exchange, just like individual stocks. When you invest in an ETF, your money is automatically spread across all the underlying holdings, providing instant diversification.

Compared to a Stock Account:

• In a stock account, you directly own each individual stock or bond, and your portfolio is managed just for you.
• An ETF, in contrast, is a pooled fund: you own shares of the fund, not the individual holdings inside it.
• Stock accounts can be highly customized, but any trading in your account can result in capital gains taxes.
• With an ETF, portfolio trades inside the fund typically do not trigger taxes for you, making ETFs more tax-efficient for most investors.

Compared to a mutual fund:

• Both mutual funds and ETFs are pooled investments, but mutual funds only trade once per day after the market closes, while ETFs can be bought or sold at any time during the trading day.
• Mutual funds can pass through capital gains taxes to investors whenever the fund manager trades the portfolio. ETFs use a special “in-kind” process that lets them buy and sell holdings inside the fund without triggering capital gains for investors.
• Both ETFs and mutual funds provide diversification, but ETFs are typically more tax-efficient, offer greater trading flexibility, and often have lower fees.

In short, an ETF combines the diversification of a mutual fund with the trading flexibility of a stock and usually has better tax efficiency than either a stock account or a mutual fund.

Questions about ETFs and how they fit into your overall financial plan? Contact us at etf@npfinvest.com.

General Risk Disclosure: Investing involves risk, including the loss of principal.

The information in this document is not complete and may be changed. The securities may not be sold until the registration statement filed with the Securities Exchange Commission is effective. This document is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer is not permitted.