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Invest in ETFs
A beginners’ guide to investing in ETFs, complete with helpful tips and the latest news.
On this page, find out everything you need to know about exchange-traded funds (ETFs). Find out what they are, how they work, and the key things you need to know before you invest in this type of fund.
Ways to invest in ETFs
Since ETFs trade on stock exchanges just like regular stocks, the easiest and quickest way to buy one is by using an online stockbroker. These are increasingly popular and regulated platforms that offer investors and traders access to a wide range of assets including stocks, mutual funds, ISAs, CFDs, and indeed ETFs.
Before investing in an ETF, make sure to conduct the necessary due diligence to inform your investment. This includes researching the industry your chosen ETF is providing exposure to and the broader financial markets. Check out any of the links below to find out more about ETFs.
What are ETFs?
An ETF is a fund that trades on stock exchanges. Rather than providing investors exposure to the performance of a single company like a stock, ETFs are intended to provide exposure to an entire industry.
It is helpful to think of ETFs as a basket of different stocks. So, if you were to buy shares in an ETF focussed on the technology sector, you would gain exposure to all of the tech companies that are included in that particular fund.
Different ETFs hold different stocks and in different ratios. Moreover, some commodity funds, such as gold ETFs, are backed by the value of physical resources stored in vaults, providing convenient, digital access to commodity investing rather than having to buy and store materials outright.
How do ETFs work?
ETFs are created when a fund manager purchases assets and/or shares in various companies within a particular sector, creating a portfolio. Then, they group these assets/shares together into a fund and sell shares in this newly-created ETF on the open market.
Thereafter, this ETF trades on the stocks exchange just like any other financial instrument.
In general, ETFs are managed by institutional banks or hedge funds that generate returns by collecting fees from investors.
How to pick the best ETF
To make sure you are investing in the right ETF, it is important that you consider a variety of things.
- Research the industry of your chosen ETF. It is impossible to know if an ETF is a good investment unless you have analysed the sector it is offering you exposure to. So, if it is an ETF that offers exposure to North American gold mining companies, make sure you have educated yourself on the gold market.
- Find out the fees. Different ETFs will incur different fees, so make sure you are aware of these because they can quickly add up.
- What assets are within the ETF? Each ETF should have its own prospectus that outlines the assets owned by the fund manager. In addition, it will explain what percentage of the total ETF each asset represents. It is important that the ETF holds assets that will interest investors, else it is unlikely to increase in value. In addition, diversified ETFs can offer the best package courtesy of their lower risk and insulation from market volatility.
- Trading volume. If an ETF has a low trading volume, this demonstrates a lack of interest in it. This is usually negative when it comes to a fund’s prospects of price discovery.
- How has the ETF performed against its relative index? If an ETF that offers exposure to an index is underperforming this index significantly, this is called a tracking error. An ETF with less tracking error is generally better.
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Fact-checking & references
Our editors fact-check all content to ensure compliance with our strict editorial policy. The information in this article is supported by the following reliable sources.
Invezz is a place where people can find reliable, unbiased information about finance, trading, and investing – but we do not offer financial advice and users should always carry out their own research. The assets covered on this website, including stocks, cryptocurrencies, and commodities can be highly volatile and new investors often lose money. Success in the financial markets is not guaranteed, and users should never invest more than they can afford to lose. You should consider your own personal circumstances and take the time to explore all your options before making any investment. Read our risk disclaimer >