What is an exchange-traded fund (ETF)?
An exchange-traded fund, or ETF, is a type of investment fund that trades on an exchange like a share.
It typically holds a basket of assets, such as shares, bonds or commodities, and aims to track the performance of an index or theme.
In simple terms, an ETF is a fund you can buy and sell on an exchange like a share.
How ETFs work
An ETF pools money to hold a collection of underlying assets, and its shares can be bought and sold throughout the trading day at market prices. Many ETFs are designed to track an index, giving investors exposure to a broad market or sector in a single trade. Because they trade like shares, ETFs combine some features of funds with the flexibility of stock trading.
Common types of ETF
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Index ETFs that track a broad market
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Sector ETFs focused on a particular industry
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Bond ETFs holding fixed-income securities
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Commodity ETFs linked to assets such as gold
ETF compared with a traditional fund
| Feature |
ETF |
Traditional fund |
| Trading |
On an exchange, intraday |
Priced once a day |
| Access |
Like a share |
Through the provider |
| Flexibility |
Higher |
Lower |
How ETFs trade and track
An exchange-traded fund holds a basket of assets, such as the shares in an index, and trades on an exchange through the day like an ordinary share. Its price tracks the value of the underlying holdings, though it can differ slightly from moment to moment. ETFs come in many forms, covering indices, sectors, bonds and commodities, and they often carry lower costs than traditional funds. As with any investment, their value can fall as well as rise with the assets they hold. Investors also check what an ETF actually holds and how closely it tracks its benchmark, since two funds covering the same theme can differ noticeably in cost and composition.
What to check before buying an ETF
ETFs offer diversification and flexibility, but they still carry the risks of the assets they hold, and their prices can fall as well as rise. Some track their index more closely than others, and certain specialised ETFs can be complex or use leverage, which adds risk. Traders should understand what an ETF holds and how it works before investing.
An ETF in action
Imagine an investor wanting broad exposure to the US market. Rather than buying dozens of shares, they buy an ETF that tracks the S\&P 500, gaining a slice of all its companies in one trade. It trades like a share and often costs less than a traditional fund, though its value still moves with the assets it holds.
How ETFs fit into a portfolio
Exchange-traded funds have become a popular way to gain diversified exposure with the ease of trading a single share. Understanding how they work and what they hold helps traders use them appropriately, while remembering that ETFs carry the risks of their underlying assets and that all investing involves risk.
Risk Warning:Trading CFDs involves significant risk and may not be suitable for all investors. Losses can exceed your initial deposit. Please ensure you fully understand the risks involved before trading.
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