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.