Exchange-Traded Funds (ETFs)
Exchange-Traded Funds, or ETFs, are investment funds that trade on a stock exchange in a similar way to shares. They typically invest in a collection of underlying investments, such as shares or bonds, allowing investors to gain exposure to a range of investments through a single product.
Many ETFs are designed to track the performance of a particular market index, such as the FTSE 100 or S&P 500. These are often referred to as passive or tracker funds. Other ETFs may focus on a particular sector, geographic market or type of investment.
ETFs can be bought and sold during the trading day at the market price available at the time. The value of an ETF will generally be influenced by the performance of the investments it holds or tracks.
Understanding ETF Risk
The level of risk associated with an ETF will depend largely on the investments or market it provides exposure to. An ETF investing across a broad market may spread investment risk across a number of companies, while an ETF focused on a particular sector, country or asset class may be more exposed to movements in that area.
ETF values can be affected by market movements, economic conditions, currency fluctuations and the performance of the underlying investments. There may also be circumstances where an ETF cannot be bought or sold as easily as expected, or where its market price differs from the value of its underlying investments.
Some exchange-traded products use more complex investment strategies or instruments and can involve additional or heightened risks. Investors should understand the features and risks of the particular product before investing.
Investment Risk
The value of investments can fall as well as rise and you may get back less than you originally invested. Past performance is not a reliable indicator of future performance. All investments involve risk, and you should ensure you understand the risks associated with an investment before making a decision.
Key Features of ETFs
Trading Flexibility
ETFs can generally be bought and sold on a stock exchange throughout the trading day at the market price available at the time.
Choice
ETFs are available across a wide range of markets, sectors, geographic regions and asset classes, giving investors a choice of where and how they invest.
Diversification
ETFs can provide exposure to a range of underlying investments through a single product, helping to spread investment risk. However, the level of diversification will depend on the investments held by the ETF.
Transparency
Many ETFs regularly publish information about their underlying holdings, helping investors understand where their money is invested.
Passive or Active Management
While many ETFs aim to track the performance of an index, some are actively managed with investment decisions made by a fund manager.
Costs
Passive ETFs can offer a cost-effective way of gaining market exposure, although charges vary between products and should be considered before investing.
Types of ETFs
Index ETFs
Designed to track the performance of a particular market index, such as the FTSE 100 or S&P 500.
Sector ETFs
Provide exposure to companies operating within a particular industry or sector.
Commodity ETFs
Provide exposure to commodities or commodity-related investments, with the structure and risks varying between products.
Bond ETFs
Invest in a portfolio of bonds, providing exposure to fixed income investments through a single fund.
Custom ETFs*
Some exchange-traded products may use derivatives, leverage or other strategies to achieve their investment objective. These products can behave differently from conventional ETFs and may involve significantly greater risks, including the potential for amplified losses.
Why investors consider ETFs
ETFs can provide access to a range of investments, markets and sectors through a single product. Depending on the ETF, they may offer diversification, trading flexibility and exposure to different markets or investment strategies.
