ETF (exchange-traded fund)

An exchange-traded fund pools investors’ money into a portfolio of assets, most often the shares or bonds in an index, and lists its own shares on a stock exchange. You buy and sell them through a broker at the market price, like any listed share. Behind the scenes, large institutions called authorised participants can create new ETF shares by delivering the underlying assets to the fund, or redeem ETF shares in exchange for those assets. This creation and redemption mechanism is what keeps the market price close to the value of the fund’s holdings, its net asset value.

ETFs are popular because they are usually cheap, transparent and easy to trade, and a single purchase can give exposure to hundreds or thousands of securities. The trade-offs are easy to miss. You pay the bid-ask spread and any broker commission each time you trade, and the ability to trade all day tempts some investors into trading too often. Not every ETF is a simple index tracker: some use leverage, derivatives or narrow themes, which can make them far riskier. In Europe most ETFs sold to retail investors are UCITS funds, often domiciled in Ireland or Luxembourg.