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What is an ETF?
Read this guide to finally get to grips with exchange traded funds and how they work
ETF stands for ‘exchange traded fund’, a type of investment that is bought and sold on exchanges. Read on to find out more about ETFs and how they can be used as an investment tool.
What is an ETF?
Just like investment funds, ETFs are made up of a basket of equities, bonds, commodities or currencies. ETFs aim to track the performance of an entire underlying asset or index – such as New Zealand’s NZ Top 50.
How does an ETF work?
For example, there are ETFs designed to track the performance of the NZ Top 50, which means these ETFs hold shares in the companies that make up the index. The proportions of shares held by the ETF allows it to track the performance of the index as closely as possible.
Say you invested in an energy ETF, instead of investing in individual energy companies, you are investing in the combined performance of many companies.
Types of ETFs
As well as ETFs which track indexes like the NZ Top 50, there are also ETFs that track other things. Here are some of the more common examples:
- Market ETFs
- Bond ETFs
- Commodity ETFs
- Sector and Industry ETFs
- Foreign market ETFs
Can you trade ETFs?
As the name suggests, ETFs can be traded on an exchange, just like equities on the stock market.
Pros and cons of ETFs
- Broad exposure to a whole industry
- Easy access
- Continuous pricing
- A single transaction
- As with all trading, it involves risk!
- Though diverse, they are not immune to volatility
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