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ETF, or exchange traded funds are securities that are traded on the open market like stocks. But instead of being shares in a single company they are shares in a mutual fund. If you understand what closed end funds are or spyders (S&P depository receipts) are they are the same thing. A fund is created with so much money in it that invests in a particular index of stocks. Let's take the EAFE (Europe, Australia, Far East) for example. The iShare fund would buy a proportionate amount of all the stock in the index. You then can purchase ownership (shares) of this index. If the value of the index goes up then you would expect your iShares to go up about the same. There can be deviations as they are not directly linked hawever the arbirtagers are out there to keep it pretty close. In the long run you won't do as well as the index as the folks who manage the fund do charge a fee for their services. Just like all other fund managers.
So as you can see, iShares can be a good way to invest money and gain diversification without having a large sum.
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