ETFs are an opportunity to invest in a class or category of coins and tokens without selecting individual cryptocurrencies. The term is borrowed from the stock market, where ETF trading is commonplace.

ETFs are exchange-traded funds. Unpacking the definition makes the term easy to understand. A fund is a group of selected investments. “Exchange-traded” means that you can invest in the fund at a stock exchange or cryptocurrency exchange.

ETFs are similar to mutual funds and index funds. The idea is that the fund manager and an institutional partner create a bundle of stocks or cryptocurrencies that reflect a market segment. When you invest in an ETF, you are essentially buying fractional shares of all the commodities in the fund.

In the crypto world, anyone can create an ETF or index fund. Typically, they are created by online crypto exchanges.

For example, an exchange might create a DeFi fund that includes the top 10 coins and tokens that are used in decentralized financial applications. The fund might comprise coins and tokens in proportion to their market capitalization or some other measure. Investors who expect the DeFi market to rise can invest in the DeFi fund instead of making individual investments in the 10 top coins and tokens.

An exchange could create a fund based on the top 10 fastest-growing cryptos based on market capitalization or the 20 cryptos that show the best price growth over the past 12 months. Other funds could be composed of cryptos that are commonly used in video games or gambling. An ETF can be designed to focus narrowly on a specific market segment or broadly on overall trends in the crypto world.