Exchange-traded funds (ETFs) are index-tracked investment funds that trade on a stock exchange. They are generally used to track the performance of particular market indices.
An ETF holds a range of assets like stocks, commodities and bonds and they trade close to its net asset value over the course of a trading day. This means that they change in value over the course of a given day.
There are a number of different kinds of ETFs including:
- actively managed ETFs
- leveraged ETFs
- exchange-traded grantor trusts.
Differences to mutual funds
The main difference between the two is that ETFs can be traded whenever the market is open. Like a mutual fund, an ETF collects together assets like stocks or bonds.
However, unlike a mutual fund, ETFs are listed on a stock exchange, providing investors with price transparency throughout the day and the ability to buy and sell holdings like trading a share, whereas mutual funds usually only price once a day.
ETFs generally also have lower costs associated with them than traditional mutual funds.
Most ETFs available in Europe are regulated under the European UCITS IV directive which provides a number of safeguards for investors:
- assets are segregated to help minimise risk
- increased transparency
- diversification limits to guard against investments becoming too concentrated in particular assets.
The value of investments can fall as well as rise and you may not get back the amount you originally invested. ISA eligibility depends on personal circumstances. Tax rules and allowances are not guaranteed and may change in the future.