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We take a look at how ETFs work and share three tips for investing in them.
This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.
It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.
An Exchange Traded Fund (ETF) invests in other investments like shares or bonds. They offer access to a diversified basket of investments for usually a much lower cost than purchasing them individually.
Most ETFs track an index – a collection of shares or bonds which represent a certain sector or region. For example, the FTSE 100 index is a list of the largest 100 companies in the UK.
When you buy an ETF, you're buying a slice of the ETF's underlying holdings.
ETFs work in a similar fashion to index mutual funds.
Index mutual funds and ETFs are both passive investments that offer investors exposure to markets around the world by tracking an underlying index. However, there are differences between the two.
Mutual funds value and trade only once a day, usually at midday, so investors won't know exactly what price they're buying or selling at until after the trade's taken place.
ETFs on the other hand are traded on a stock exchange, like shares. They also track an underlying index, but the prices of ETFs fluctuate through the trading day. The ability to trade ETFs throughout the day adds greater flexibility, however timing the market is a tricky, if not impossible, exercise.
Tracker funds often invest in every stock which makes up the index it's trying to replicate – known as full replication.
Some funds won't invest in every stock, known as partial replication. This could be because some companies are too small for example, or are about to drop out of the index. Either way, buying and selling companies involves costs which eat away at performance. To try to keep performance as close to the index as possible, tracker funds can use techniques like reinvesting dividends at an appropriate time to keep costs to a minimum.
Learn more about ETFs and other Exchange Traded Products
ETFs can be a great way to invest, but there's a risk investors could be caught out if they aren't aware of some simple tips when trading.
We look at three main ones below.
This article isn't personal advice. If you're not sure if an investment is right for you, seek financial advice. All investments can fall, as well as rise in value so you could get back less than you invest.
You can learn more about the benefits of investing in ETFs via our research page.
Our expert research team provide regular updates on a range of exchange traded funds (ETFs).
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This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.
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