An exchange-traded fund, or ETF, is a type of investment fund that holds a collection of assets, such as shares, bonds or commodities, and trades on a stock exchange much like an individual share would. Buying a single unit of an ETF gives you exposure to everything inside that fund, which is why they're often described as a way to access diversification without having to buy each underlying asset separately.
How ETFs are structured
Most ETFs are designed to track the performance of a particular index, sector or theme, holding a basket of assets that mirrors it as closely as possible. Because they trade on an exchange throughout the day, their price can move up and down during trading hours, unlike some other types of pooled funds that are only priced once a day. This structure also tends to keep running costs relatively low compared with more actively managed funds.
Why people use them
ETFs are often used by people looking for broad exposure to a market or sector without needing to research and pick individual investments themselves. They can also be a way to add diversification to a portfolio that might otherwise be concentrated in just a few holdings.
- Hold a basket of assets in a single, exchange-traded fund
- Often track an index, sector or theme
- Can be bought and sold during market trading hours
- Generally lower running costs than actively managed alternatives
Keeping perspective
Like all investments, ETFs carry risk, their value can fall as well as rise, and returns vary and aren't guaranteed. Different ETFs carry different levels of risk depending on what they hold. This is general educational content, not investment advice, and it's worth researching a specific fund's holdings and costs before deciding anything.
