ETF essentials · 2 minute read
Equity ETFs explained: what are you investing in?
The short answer
An equity ETF provides exposure to company shares. Its value rises and falls with the companies and markets it invests in, so it can offer long-term growth potential but also substantial short-term losses.
Why it matters
Most hold shares directly; some use financial contracts to obtain the return of a share index. Our replication guide explains the difference.
Equity ETFs range from very broad global funds to narrow funds covering one country, sector or investment style.
Their risk depends on factors such as:
- The countries and sectors included
- The number and size of the companies
- How heavily the largest companies are weighted
- Currency movements
- Whether the ETF follows a broad market or a specialist theme
Owning hundreds of shares reduces dependence on one company, but it does not protect against a general fall in equity markets.
A simple example
A global equity ETF might hold more than 1,000 companies across several countries. A technology ETF might hold fewer companies from one sector.
Both are equity ETFs, but the technology fund is likely to be more influenced by a smaller group of businesses and may experience larger price movements.
What to check
- Which countries and sectors are included?
- How many companies does the ETF hold?
- How much is invested in the ten largest holdings?
- Are emerging markets or smaller companies included?
- What currency exposure does the fund create?
Key term explained
Equity means ownership in a company, usually through its shares. An equity investor participates in the company’s gains and losses.
The label “equity ETF” is only the starting point. The index and holdings show what type of equity exposure you are actually buying.