What is an ETF?
An ETF is an exchange traded fund – a form of investment fund that’s bought and sold on stock exchanges. ETFs usually seek to track the performance of a benchmark index, and hold assets that help them to do just that.
ETFs have become a hugely popular way to invest in the financial markets, because they offer:
ETFs are usually designed to track the performance of an index, like the FTSE 100, but they can also track sectors such as energy, agriculture or healthcare, or individual markets like gold, oil or the US dollar. An ETF will hold assets that enable it to track its benchmark market as accurately as possible – for example, a FTSE-tracking ETF might hold shares in all of the FTSE 100’s constituent companies.
Like stocks, ETFs are divided into shares that you can buy or sell on an exchange. This means you can gain exposure to the performance of an entire index or sector, with a single trade. For instance, instead of buying shares in many individual energy companies, you could buy shares in one ETF tracking the energy sector. From a solitary transaction, you’d gain broad exposure to the industry’s combined performance, and subsequently have only one open position to monitor and manage.