What does ETF stand for?
ETF stands for exchange-traded fund. The name captures two defining features: it is a fund (holding a collection of assets), and it is exchange-traded, meaning it is bought and sold on a stock exchange during market hours at a live price.
This distinguishes ETFs from traditional mutual funds, which are priced once at the end of each trading day. You can read more about that distinction in our guide to index funds vs ETFs.
How do ETFs work?
ETFs work by pooling investor capital to buy a collection of assets that mirror a target index or strategy. Here is the process from start to finish:
An ETF provider (such as iShares, Vanguard, or SPDR) creates the fund and sets its investment objective, for example to track the FTSE 100.
The fund buys the underlying assets, whether shares, bonds or commodities, in proportions that replicate the target index.
Feature | ETF | Mutual Fund | Index Fund |
How it’s traded | Exchange (intraday) | Via fund manager (end of day) | Via manager or exchange |
Pricing | Real-time market price | Daily NAV | Daily NAV or real-time |
Management style | Usually passive | Often active | Always passive |
Typical costs (OCF) | 0.03%-0.50% | 0.5%-2%+ | 0.05%-0.25% |
Minimum investment | Price of 1 share | Often £500-£1,000+ |
Types of ETF available to UK investors
ETFs span a wide range of asset classes, geographies and strategies. The most common types include:
Equity ETFs - track a stock index such as the S&P 500, FTSE 100, or MSCI World Often considered the most popular ETF category globally.
Bond ETFs - hold government or corporate bonds, offering income and typically lower volatility than equity ETFs.
Commodity ETFs - provide exposure to gold, silver, oil, or agricultural products via physical holdings or futures contracts.
Sector and thematic ETFs - focus on specific industries such as technology or healthcare, or investment themes including clean energy and AI.
Multi-asset ETFs - blend equities, bonds and other assets in one fund, offering built-in diversification.
Smart beta/factor ETFs - use rules-based strategies weighted by factors like value, momentum, or low volatility rather than market capitalisation.
Taking a diversified approach is usually recommended (i.e.: investing in a variety of different ETFs, as well as others), to avoid having a single point of failure. Which strategies you choose depends on your individual risk appetite or tolerance.
See our roundups of the best UK ETFs and the best global ETFs to watch. You may also want to read about
Advantages and risks of ETFs
ETFs have grown rapidly in popularity for good reason, though they are not without risk. Here are some of the commonly understood advantages and risks associated with ETFs.
Advantages | Risks |
Diversification in a single trade, as one ETF can hold hundreds of stocks or bonds | Market risk, as ETFs fall in value when their underlying markets fall |
Low cost, with most passive ETFs charging between 0.03% and 0.20% per year | Tracking error, meaning an ETF may not perfectly replicate its index |
Intraday liquidity, so you can buy and sell at market prices throughout the trading day | Liquidity risk, since some niche ETFs have low trading volumes |
Transparency, as most ETF providers publish their full holdings daily | Currency risk, as international ETFs expose you to foreign exchange movements |
Tax efficiency, with generally lower capital gains distributions than active funds | Concentration risk, since some sector or thematic ETFs hold relatively few companies |
ISA and SIPP eligible, so they can be held in tax-efficient wrappers | Counterparty risk with synthetic ETFs, which use derivatives rather than holding assets directly |
