ETF definition

ETF stands for exchange traded fund, a type of investment security that is bought and sold on exchanges.

It is one of several exchange traded products (or ETPs), with others including exchange traded commodities (ETCs) and exchange traded notes (ETNs). Investors sometimes refer to all types of ETP as ETFs, as they are the most well-known type of exchange traded product.

Instead of trading baskets of debt securities or commodities, ETFs aim to track the performance of an underlying set of assets or index, like the FTSE 100.

ETFs can vary in lots of ways, including:

  • Physically replicated ETFs, which buy the underlying assets (usually equities or bonds) which the benchmark tracks, or synthetically replicated ETFs which use derivatives (like swap agreements) to get exposure to the benchmark and track its performance
  • Income distribution ETFs, which return dividends to investors, or accumulated distribution ETFs, which reinvest them into the fund
  • Smart beta ETFs, which use extra rules to try and outperform their benchmark

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