Yahoo Finance’s Brian Cheung breaks down ETFs in this week’s Yahoo U.

Video Transcript

AKIKO FUJITA: Well, ETFs are on track to hit another record this month with about $480 billion already flowing into exchange traded funds. But what exactly are ETFs? And how is it different from a mutual fund? Yahoo Finance's Brian Cheung here with this week's Yahoo U.

BRIAN CHEUNG: Class is in session. Today, we're talking about exchange traded funds. It's a type of security that's become enormously popular in the rise of passive investing. But what exactly is it? Well, think about the S&P 500. You probably don't have enough capital or time to buy shares of all 500 or so companies in there, right? So instead, you could buy a share of the SPDR S&P 500 ETF, or SPY. This exchange traded fund tracks the S&P 500 index. So when the index goes up, so does the value of your share in SPY.

Now there are many, many ETFs out there now, which can target stocks focused in specific industries or regions of the world. ETFs can also track more than just stocks. For example, you can target bonds or baskets of foreign currencies. You can also get exposure to a range of commodities.

Buying ETFs is one way of passive investing because it allows someone to, in one fell swoop, get exposure to a whole swat of assets. And along with investing in mutual funds, ETFs have become enormously popular in recent years. This data from Bank of America Global Research shows that trillions have flown into passive strategies for investing in US stocks.

Meanwhile, trillions have left active funds. And one reason is because of cost. It's a lot cheaper to buy an ETF than it is to hire an active manager to day trade, or at least, regularly manage a portfolio. But of course, trends are trends. Active fund managers were all the rage in the '80s and '90s. And who knows if the switch to passive will hold? But we'll leave that for another Yahoo U. For now, class is dismissed.

AKIKO FUJITA: And you can learn much more about ETFs, as well as other assets to invest in. You can step up your investment strategy with a free 14-day trial for Yahoo Finance Plus. Get expert research reports, actionable investment ideas, and advanced portfolio tools in a sleek, ad-light experience. So you can check it out today at YahooFinance.com/plus.