<p>An exchange-traded fund (ETF) is a type of investment fund that tracks a specific market index, sector, or asset. It's like a basket of securities that you can buy or sell on a stock exchange, similar to individual stocks.</p>

<h2>How It Works</h2>
<p>ETFs are passively managed, meaning they aim to replicate the performance of a specific market index or sector. Here's how they work:</p>
<ul>
  <li><strong>Creation and Redemption:</strong> Authorized participants (large institutions) create or redeem shares of an ETF by exchanging baskets of securities with the ETF provider.</li>
  <li><strong>Trading:</strong> ETF shares are traded on stock exchanges just like stocks. Investors can buy or sell ETF shares through a brokerage account.</li>
  <li><strong>Dividends:</strong> ETFs often distribute income generated from the underlying securities. This can be in the form of dividends, interest, or capital gains.</li>
</ul>

<h2>Why It Matters</h2>
<p>ETFs matter because they offer several benefits to investors:</p>
<ul>
  <li><strong>Diversification:</strong> ETFs provide instant diversification as they hold many securities. This can help reduce risk compared to investing in individual stocks.</li>
  <li><strong>Liquidity:</strong> ETFs are highly liquid, meaning they can be easily bought and sold on stock exchanges. This makes them accessible to a wide range of investors.</li>
  <li><strong>Cost-Effective:</strong> ETFs typically have lower fees than actively managed mutual funds because they are passively managed and require less intervention.</li>
</ul>
<p>For example, an investor interested in the technology sector could buy shares of a technology sector ETF, providing exposure to many tech companies with a single trade.</p>