Exchange-traded funds, also known as ETFs, have been doubling their assets every several years. Sounds good - but what exactly are ETFs? What makes them such a popular and potent investment vehicle?

ETFs are best understood as mutual funds that trade like stocks. While mutual funds are priced once daily near closing, and all mutual fund purchasers must pay the same price regardless of the time of day that they made their purchase, stocks can be traded intraday, thereby allowing investors to take advantage of short-term intraday market movements. Mutual funds are investment vehicles comprising of a pool of moneys collected from many investors to invest in securities like stocks, bonds, money market instruments and other assets. Mutual fund investors purchase part ownership of the mutual fund company and its assets. The typical mutual fund holds hundreds of different securities, meaning that mutual fund shareholders are capable of attaining diversification at comparatively low prices.

The benefits of ETFs are varied. ETFs offer low turnover and broad diversification, while being cheaper in comparison than other options. ETFs also come in many different varieties: they cover all major indexes (like Dow Jones, S&P, Nasdaq) and all sectors of the equities market (large caps, small caps, growth and value). They also come in international, regional, and specialized varieties that cover specific industries such as technology, biotechnology, energy, and market niches (REITs and gold). Many refer to ETFs as a kind of disruptive technology, in the sense that they are a rare combination of fast, reliable, and inexpensive.

The success of ETFs is founded on a host of their appealing qualities, such as their low-cost status, diversification capabilities, liquidity, tax-efficiency, convenience, and transparency. All of these traits help exchange-traded funds democratize the world of investment, by pushing fees towards zero, and creating market-wide pressure for others to repackage existing investment strategies and themes into something resembling an exchange-traded fund. On the flip side, the popularity of ETFs stirs up worries that near-ubiquity will produce corresponding negative effects, though these have yet to materialize.

An ETF is a type of marketable security, or an unrestricted financial instrument that may be purchased or sold on public stock or bond exchanges. They are liquid, and may be rapidly converted into money at reasonable prices. Marketable securities tend to be very liquid because their maturities are typically under a year. The rates at which they are bought or sold also has minimal impact on their prices. Marketable securities are appealing because their high liquidity renders them an excellent way for businesses to store their reserved cash and earn interest rates simultaneously.

Marketable securities can be bought or sold on public exchanges, and are hence either marketable equity or debt securities. Marketable securities also have strong secondary markets to facilitate speedy buy/sell transactions. These secondary markets provide accurate price quotes for investors. Finally, because of their high liquidity and the comparative security of investing in them, marketable securities do not typically offer high returns. Some examples of marketable securities include common stock, commercial paper, banker's acceptances, Treasury bills, and other money market instruments.

Although ETFs have many benefits, they also have drawbacks, including the comparatively large brokerage commissions involved with making transactions.