What is an ETF?

An Exchange Traded Fund (ETF) is a basket of securities traded on a stock exchange created in order to track a particular index. ETFs are open ended mutual funds that are different from unit trusts in that they are bought or sold throughout the trading day using a stockbroker in the same way as an investment trust or ordinary company share.

ETFs first launched on the US market in 1993 and were introduced to European markets in 2000. They have grown considerably since then and now there is more than €85 billion across nearly 400 ETFs in Europe.

ETFs cover a wide scope of investment areas including; agriculture such as wheat, precious metals such as gold or silver, as well as main stock market indices such as the S&P 500 and FTSE 100.

ETF Providers

There are a number of ETF providers each offering a different range of ETFs. Some of the main providers are ETF Securities Limited, ishares (part of Barclays) and Lyxor (part of SocGen).

ETF Characteristics

Flexible

ETFs can be bought and sold throughout the trading day, allowing investors constant access to a live valuation of their investment. The majority are also eligible to be held within an ISA or SIPP.

Transparent

The composition of each ETF is usually published daily by the ETF provider allowing investors to analyse their holdings in full.

Low Cost

The total running cost of an ETF is generally lower than an index tracker unit trust or OEIC. However, it should be noted that ETFs are subject to stock broking commission when buying and selling.

Diverse

ETFs offer retail investors direct access to areas in which they would otherwise find it difficult to invest such as livestock, agriculture and world markets such as South Africa and Kuwait.

Stamp Duty Exempt

There is currently no stamp duty payable on the purchase of ETFs.

Low Tracking Errors

The price is determined by the NAV of the underlying assets and they generally manage to track the index very closely. See ETF Pricing for more.