ETF

Quick definition

An ETF is an investment fund that’s available to buy on the stock exchange.

Key details

• ETFs are funds that you can buy shares in through your stock broker
• Each fund is designed to follow the performance of a particular index or industry by owning a basket of assets
• ETFs are a beginner-friendly way to invest because they give you easy access to a range of popular stocks

What is an ETF?

‘ETF’ stands for ‘exchange-traded fund’, and it’s a fund that’s listed on a stock exchange. You can buy or sell shares in an ETF through a stock broker at any time of day and it has its own ticker symbol and share price. ETFs are one of the easiest ways to invest because they’re simple, low-risk, and require little expertise to get started.

Each ETF holds a range of assets; most commonly stocks but which can be bonds, commodities, currencies, or even cryptocurrencies. The share price of the fund rises and falls based on the performance of these assets.

A good way to understand ETFs is with an example. The first of these funds was set up in the early 1990s, to give investors a way to track the entire S&P 500 Index. The fund works by owning all of the stocks within the index, or at least a representative sample, so that its performance mirrors that of the index.

What are some examples of ETFs?

Most ETFs are set up to track the performance of a major stock market index, such as the FTSE 100. However, there are lots of different ones available and they cover a wide variety of industries and own many types of assets. Here are some of the best-known ETFs around:

• Vanguard S&P 500 Index ETF. Every ETF is run by an investment firm that deals with the day-to-day management of the fund. Vanguard and BlackRock are two of the biggest names in the business and – generally – ETFs that are run by bigger companies offer lower fees and are more reliable than smaller ones. This particular fund has been tracking the S&P 500 since 2012.
• iShares Global Clean Energy ETF. Rather than an index, many ETFs track a particular industry or segment of the market. In this case, the fund only holds companies that are involved in the production of clean energy. This type of ETF can be more volatile than a simple index tracking fund, but is an easy way to gain exposure to an industry that you expect to do well.
• Ark 21Shares Bitcoin ETF. You can also use ETFs as simple ways to own assets that would otherwise be a bit more complicated to get your hands on. There are ETFs that track the price of gold and silver, for example, but the next wave might come from cryptocurrency. The Ark ETF is awaiting final approval but there are now a handful of Bitcoin ETFs that offer a regulated route into the crypto world.

What’s the difference between an ETF and a mutual fund?

They are very similar in many ways but the main difference is that ETFs trade on the stock market and you can buy or sell them at any time of day. To buy into a mutual fund, you have to place an order that is carried out at the end of the trading day, at a fixed price.

One other significant difference is that mutual funds are actively managed, while ETFs are usually ‘passive’. That means there is a professional investor in charge of a mutual fund who decides which stocks to invest in, while ETFs simply track the performance of a market or index. Though it’s worth noting that there are a handful of managed ETFs as well.

Where can I learn more?

For more information about exchange-traded funds, the different ones available, and how to choose the best funds, check out our ETF hub. To learn more about investing and the stock market, our helpful courses will take you through everything you need to know.