An exchange-traded fund (ETF) pools investor money into a defined investment portfolio while issuing shares that trade on an exchange like individual stocks. A share represents a slice of a basket that may contain equities, bonds, commodities, derivatives, or a mix of assets; the prospectus states the fund’s goals and risks. Investors can buy and sell ETF shares during trading hours through a brokerage account using a ticker symbol. section 4.1 section 4.1.2
ETF shares have both a market price and a net asset value (NAV). NAV is the per-share value of the underlying holdings, whereas the market price responds to supply and demand. A market price above NAV is a premium; one below NAV is a discount. section 4.1.2
Creation and redemption
If an ETF holds $1 billion in assets and has 100 million shares outstanding, its NAV is $10 per share. Exchange trading can still push the share price to $10.05 or $10.25. Authorized participants can deliver the required basket of securities for newly created ETF shares, or return ETF shares for the underlying securities. This create/redeem mechanism helps limit sustained gaps between market price and NAV. section 4.1.2
Table 4.1 Sector weights in the market and optimized portfolios
| Stock | Shares | Share price | Value |
| A | 15,000,000 | $40 | $600,000,000 |
| B | 3,000,000 | $100 | $300,000,000 |
| C | 2,000,000 | $50 | $100,000,000 |
The holdings table supplies a small three-stock basket—A, B, and C—whose $1 billion total makes the per-share NAV example concrete. section 4.1.2
ETFs are common building blocks for robo-portfolios because they combine diversified exposures with intraday tradability, relatively low fees, and potential tax efficiency. Their range follows the range of available indices, including smart beta strategies that tilt toward nonmarket factors and socially responsible investing (SRI) strategies focused on companies considered beneficial to society. section 4.0 section 4.5
The create/redeem mechanism can also support tax-efficient rebalancing. Instead of selling an appreciated holding when an index changes, an ETF can exchange securities with an authorized participant. In the illustrated heartbeat trade, stock A leaves a small-cap index and stocks B through E enter; exchanging stock A rather than selling it avoids the described realized capital gain and taxable event. section 4.2.3
For tax-loss harvesting, ETFs can provide similar—but not identical—exposure after a loss is realized. Candidate replacements should be compared for trading cost, liquidity, index breadth, and whether they may be substantially identical; funds tracking the same index can be too similar for this purpose. section 14.0 section 14.4.2
