What are ETFs?

What are ETFs?

By CIRCA5000 TeamBack to Mission Control

Types of investments • 1 min read

What are ETFs?

ETFs (Exchange Traded Funds) are a type of fund that allow you to buy a basket of stocks that fit with a set of rules, known as an index – instead of employing a fund manager to pick individual stocks.

ETF is a low cost, diversified way to start investing.

WHAT DOES AN ETF LOOK LIKE?

ETFs come in a number of different shapes and sizes. They can be baskets of stocks, bonds, or other assets. They can track indices based on country i.e. USA stocks, company size i.e. FTSE 100, or a particular theme i.e. Clean Energy. 

EXAMPLES: FTSE 100 ETF

The FTSE 100 Index is a list of the 100 largest companies listed on the London Stock Exchange. It houses companies like HSBC and Tesco. An ETF designed to track this index will buy the same 100 stocks in the same proportion as the index. So if HSBC is 7% in the index, it’ll be 7% in the ETF.

Investors in the ETF get exposure to the 100 companies without buying 100 different shares. Instead of having to buy HSBC, Tesco and the rest individually, they just buy the ETF and that gives access to all the 100 companies in one.

WHY CAN ETFS CHARGE LOWER FEES?

Because ETFs don’t have to pay expensive fund managers or research teams, they’re usually cheaper than funds that do. This means ETFs can be a cheap and effective way to get a diversified investment portfolio.

ETFs also trade on a stock exchange – just like a stock. This means they can be bought and sold just like a stock. Assuming a typical ETF might represent 50-100 individual stocks, buying five ETFs means you could have exposure to 250–500 individual companies that will be automatically bought and sold according to the index rules. As an investor you would only have five holdings in your portfolio and five transactions.

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