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What is an ETF?

Read this guide to finally get to grips with exchange traded funds and how they work

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Fact checked

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.

With ETFs, you can spread bet, or trade CFDs on ETFs. Similarly, you can buy or sell them with a share trading account.

Pros and cons of ETFs

Pros

  • Broad exposure to a whole industry
  • Easy access
  • Transparent
  • Continuous pricing
  • A single transaction

Cons

  • As with all trading, it involves risk!
  • Though diverse, they are not immune to volatility
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Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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