ETF essentials · 2 minute read

What is an ETF? A simple explanation

The short answer

An ETF, or exchange-traded fund, is an investment fund that can be bought and sold on a stock exchange. One ETF can give you access to many companies, bonds or other investments in a single purchase.

Why it matters

Buying one company’s shares means your result depends heavily on that company. An ETF can spread your money across a wider group of investments.

Many ETFs follow an index. For example, an ETF might track a group of large US companies, companies from around the world or government bonds. Other ETFs use an active strategy chosen by a fund manager.

The price of an ETF moves during the trading day. You normally buy or sell it through an investment platform or broker, in much the same way as a share.

An ETF is not automatically safe. Its value depends on what it owns. A broad global share ETF, a bond ETF and a technology ETF can have very different levels of risk.

A simple example

Instead of buying shares in 20 individual companies, an investor could buy one ETF that holds those companies and hundreds more.

That may make the investment easier to manage and more diversified. However, the investor still needs to check which companies, countries and sectors dominate the ETF.

What to check

• What does the ETF invest in?
• Which index or strategy does it follow?
• How diversified is it?
• What does it cost?
• What risks could cause its value to fall?

Key term explained

An exchange-traded fund is a pooled investment fund whose shares are bought and sold on an exchange.

The most important question is not simply “Is this an ETF?” It is “What does this ETF own, and what role would it play?”