An ETF is a basket of stocks that you buy like one stock. It trades all day, and one bad company hurts less.
Try it
The basket holds 10 companies, 10% each
#1
#2
#3
#4
#5
#6
#7
#8
#9
#10
Company #1 moves by−40%
−90%0+90%
Company #2 moves by+15%
−90%0+90%
Company #3 moves by0%
−90%0+90%
You put in $1,000. Go up or down. The other 7 stay flat.
Your result
Your $1,000 in the ETF became
$975
−$25 · −2%Each of the 10 companies is 10% of the ETF.
Only company #1 · $1,000
$600
−$400 · −40%
The ETF · $1,000
$975
−$25 · −2.5%
What just happenedEach company is only 10% of the ETF, so a swing is cut to a tenth. The three moves add up to −2.5% for the whole basket. Ups and downs offset each other.