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What are ETFs?

Posted: 25 May 2020

Contributor: London Stock Exchange |

An exchange-traded fund (ETF) is an investment fund usually designed to track a particular index. This is typically a stock market index, such as the FTSE 100.

In effect, ETFs provide you with exposure to indices in equities, bonds, commodities or a mix of those assets. By buying the whole basket of securities rather than individual assets, you are able to hit certain geographies and industries helping you reduce the risk of betting all your money on one company. 

ETFs are traded on stock exchanges just like shares and can be purchased through a stockbroker using a share dealing account, ISA or SIPP. While you might have to pay Stamp Duty Reserve Tax on shares you buy, ETFs are not liable for tax. They have been growing in popularity because of the perceived benefits:

  • Ease of access: there are thousands of ETFs available globally, giving investors access to a wide range of markets
  • Diversification: ETFs help to mitigate risk because they are spread across a large number of underlying securities
  • Transparency: most ETFs are considered to be very transparent because they disclose their full holdings online each day
  • Cost efficiency: ETFs are passively managed, which means you don’t pay a fund manager to pick securities for you
  • Liquidity: they are traded on stock exchanges, which means you can buy and sell them during trading hours.

Disclaimer

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