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.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results.

Why ETFs?

ETFs have become a hugely popular way to invest in the financial markets, because they offer:

Excellent value

Benefit from lower fees than active funds,1 fewer transaction fees, and no stamp duty2

Diversification

Gain exposure to a range of different asset classes, sectors and regions

More opportunities

Access markets you couldn’t normally reach, such as whole stock indices, and invest at any time during market hours

Full transparency

See the assets your ETF holds and know exactly how it’s performing at any time

Ease and efficiency

Track a whole index, sector or emerging market with a single transaction

Established credibility

Join a fast-growing global industry with over $3.8 trillion in assets under management

How do ETFs work?

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.

Open your account

It's free to open an account, normally takes less than five minutes, and there's no obligation to fund or trade.

1 Source: foxbusiness.com

2 Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.