Exchange traded funds (ETFs) are a form of investment that combine the features of funds and equities.
Like other investment funds, ETFs are made up of a group of different assets, such as shares or commodities. An ETF will contain assets that help it to track the performance of its underlying market as closely as possible.
For example, there are several FTSE 100-tracking ETFs available that will contain the constituents of the FTSE 100, in proportions that help it to match the index’s price. Other ETFs might aim to track entire sectors, or the price of an individual market like gold.
The key difference between ETFs and other funds is how they are traded. As the name suggests, ETFs are bought and sold on exchanges, just like commodities or shares.
Each ETF is divided into units, which you can buy or sell. That means you could gain exposure to an entire sector with just a single trade by buying a unit of an ETF.
Because ETFs are traded on exchanges, they can be bought and sold throughout the trading day and will have their prices continuously updated. They are also far more transparent than other types of fund: you can always see how your ETF is performing, and exactly what it is invested in.