Exchange Traded Funds

What is an ETF?

An Exchange Traded Fund or ETF is a way to invest in a whole market or index by buying a single unit that acts like a company share. For example, there are ETFs tracking the FTSE in the UK, the S&P in the US and even the price of cocoa, sugar and gold.

If you wanted to invest money in every FTSE 100 company, buying individual shares would be time-consuming and expensive. An ETF gives you access to a full index or market without the need for lots of separate transactions.

ETFs bring together the portfolio diversification of a traditional fund with the flexibility of a shareholding. They are a low-cost option because there is no need to pay an investment manager. Plus, ETFs offer the ease of access and clear pricing of shares.

Why choose an ETF?

ETFs offer a range of benefits:

  • Low costs – because an ETF is not actively managed by someone deciding which assets to buy, costs stay low
  • Simplicity – ETFs work like shares, so they can be traded through a stock exchange like any other stock
  • Flexibility – almost every asset class and global market in the world is accessible through ETFs
  • Liquidity – because ETFs are easy to trade, your investment can be readily converted into cash in most instances
  • Risk management – ETFs provide easy diversification by spreading investment across a range of securities including cash, bonds, property, equities and commodities
  • Transparency – unlike some other investment types, ETF prices are clear and easy to understand, with defined trading costs
  • Tax efficiency – ETFs are currently exempt from stamp duty and many can be purchased through a Stocks and Shares ISA or Self-Invested Personal Pension (SIPP)

If you’re not quite ready to invest in ETFs and would like to understand a bit more about investing in general, then take a look at our ‘Introduction to investing’ section and ‘Glossary’. These can be found in the right-hand panel.

The value of investments can fall as well as rise and any income from them is not guaranteed and you may get back less than you invested. Past performance is not a guide to future performance. Read more