What is an ETF?

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

Updated

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
Data indicated here is updated regularly
Name Product Price per trade Frequent trader rate Platform fees Brand description
Fineco
£2.95
£2.95
Zero platform fee
Fineco Bank is good for share traders and investors looking for a complete platform and wide offer. Your first 50 trades are free with Fineco, until 30/09/2020. T&Cs apply. Capital at risk.
IG
0% commission on US shares, and £3 on UK shares
From £5
£0 - £24 per quarter
IG is good for experienced traders, and offers learning resources for beginners, all with wide access to shares, ETFs and funds. Capital at risk.
Hargreaves Lansdown Fund & Share Account
£11.95
£5.95
Transfer out fee
Hargreaves Lansdown is the UK's biggest wealth manager, with the depth of features you'd expect from an established platform. Capital at risk.
eToro Free Stocks
0% commission, no markup, no ticket fee, no management fee
N/A
Withdrawal fee & GDP to USD deposit conversion
eToro is good for social trading - letting you mirror the portfolios of other traders. Capital at risk. 0% commission but other fees may apply.
Interactive Investor
From £7.99 on the Investor Service Plan
From £7.99 on the Investor Service Plan
No transfer fees or exit fees. £9.99 a month on the Investor Service Plan
Capital at risk.
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Data indicated here is updated regularly
Name Product Minimum deposit Maximum annual fee Price per trade Brand description
Hargreaves Lansdown stocks and shares ISA
£100
0.45%
£11.95
Hargreaves Lansdown is the UK's biggest wealth manager. It's got everything you'll need, from beginners to experienced investors. Capital at risk.
Interactive Investor stocks and shares ISA
£100 or £25 a month
£119.88
£7.99
Interactive Investor offers everything most investors need. Its flat fees makes it pricey for small portfolios, but cheap for big ones. Capital at risk.
Saxo Markets stocks and shares ISA
No minimum deposit requirement
0.12%
£8.00
Saxo Markets offers a wide access to a range of stocks, ETFs and funds. Capital at risk.
AJ Bell stocks and shares ISA
£500
0.25%
£9.95
AJ Bell is a good all-rounder for people who to choose between shares, funds, ISAs and pensions. Capital at risk.
Fidelity stocks and shares ISA
£1000 or a regular savings plan from £50
0.35%
£10.00
Fidelity is another good all-rounder, offering a good package at a decent price. Not suited for trading shares. Capital at risk.
Nutmeg stocks and shares ISA
£100
0.75%
£0
Nutmeg offers three types of portfolios. Choose the one that goes with your investment style. Capital at risk.
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Data indicated here is updated regularly
Name Product Minimum investment Choose from Annual fee Brand description
PensionBee Pension
No minimum
7 funds
0.5% - 0.95%
Pension Bee is a newbie in the pension market. It helps consolidate your pension plans into one place. Capital at risk.
Hargreaves Lansdown Pension
£100
2,500 funds
0-0.45%
Hargreaves Lansdown is the UK's biggest wealth manager. It's got three different retirement options. Capital at risk.
Interactive Investor Pension
£25/month
Over 2,500 funds
£10/month
interactive investor is a flat-fee platform, which makes it cost effective for larger portfolios. Capital at risk.
Saxo Markets Pension
Saxo Markets Pension
£10
Over 11,000 funds
No annual fee
Saxo Markets gives flexibility and control over your investment strategy. Capital at risk.
AJ Bell Pension
£1,000
Over 2,000 funds
0.05-0.25%
AJ Bell has two different pension options, a self managed pension and one that is managed for you. Capital at risk.
Moneybox Pension
£1
3 funds
0.15% - 0.45% charged monthly
Manage your money with an easy-to-use Moneybox app. Capital at risk.
Moneyfarm Pension
Moneyfarm Pension
0.35%-0.75%
7 funds
£1,500 (initial investment)
Moneyfarm has pensions that are matched against your risk appetite, goals and planned retirement date. Capital at risk.
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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.

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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