What is an ETF?

Read this guide to finally get to grips with ETFs and how they work

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All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Capital is at risk.
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 the FTSE 100

How does an ETF work?

For example, there are many ETFs designed to track the performance of the FTSE 100. This 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’d be investing in the combined performance of many companies.

Types of ETFs

As well as ETFs which track indexes like the FTSE 100, 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 dealing account or through a stocks and shares ISA.

Check out the following share trading providers and see if one is right for you:

Table: sorted by promoted deals first
Updated April 5th, 2020
Name Product Price per trade Frequent trader rate Platform fees
Hargreaves Lansdown Fund & Share Account
£11.95
£5.95
Transfer out fee
Your capital is at risk.
IG
0% commission on US shares, and £3 on UK shares
From £5
£0 - £24 per quarter
Your capital is at risk.
eToro Free Stocks
0% commission, no markup, no ticket fee, no management fee
N/A
Withdrawal fee & GDP to USD deposit conversion
Your capital is at risk.
Saxo Markets Share Dealing Account
£8
0.05% (min £5)
0.12% per year & transfer-out fee
Your capital is at risk.
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Compare up to 4 providers

All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Capital is at risk.

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, not immune to volatility
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