ETFs

The initials ETF stand for exchange-traded fund. ETFs track indices or baskets of stocks, such as the FTSE 100 or the FTSE 250. They are bought and sold on a stock exchange, like shares but they represent a collection of securities, so they give investors the chance to track the performance of a wide range of stocks.

Most ETFs are known as passive investments, which means that they simply track an index, rather than try to outperform it. Most unit trusts and OEICs are actively managed, so fund managers dedicate time and effort trying to generate better returns than would be achieved by simply tracking an index.

Because ETFs are almost always passive investments, they have very low annual charges. They are also exempt from stamp duty.

In recent years, ETFs have become extremely popular. Unlike unit trusts, ETFs are priced and traded throughout the day. 

ETFs do not just track UK indices but indices from around the world, such as the Dow Jones in the US, the Deutsche Borse in Germany or even the Chinese stock market. ETFs have been created to track entire regions as well, such as South America or Asia.

Investors can also buy ETFs that track other types of assets, such as government bonds (like Gilts) or even timber and forests.