Exchange-traded funds (ETFs)
ETFs provide an easy, low-cost way to invest in indexes, sectors and areas
Benefits of investing in exchange-traded funds
- Invest in a wide range of asset classes, sectors or areas.
- Lower cost, compared to other fund types
- Easily diversify your portfolio
- Easy to deal (priced and dealt throughout the day)
How do exchange-traded funds work?
The majority of ETFs will track an underlying index, such as the FTSE 100, or several indices. They can also track hybrid indices or a pre-selected basket of shares that meet certain quantitative screening measures.
The simplest way to track an index is to buy every underlying constituent at the same weightings. This is costly and unnecessary, so some ETFs use a sample. Other funds attempt to track indices using futures and derivatives.
Exchange-traded funds are low cost
ETFs generally have low management charges. Although standard dealing charges apply, most ETFs benefit from being exempt from stamp duty.
How to buy exchange-traded funds
Similar to Exchange-traded commodities (ETCs), ETFs are listed on the stock exchange and traded throughout the day like shares. You can therefore buy and sell them like shares.