What is an ETF? A Brief Explainer

VIDEO: If you're new to investing in ETFs, Ollie Smith is here to explain that it can be a lot easier than even a difficult phone call...

Ollie Smith 20 February, 2024 | 8:58AM
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Ollie Smith: Yeah. No, cool, cool, cool, cool. I would have said the same thing. I'm going to stop you there though. I've got to go. I'm actually in the studio filming an explainer about ETFs. Yes, I do like a challenge. Yes. I've got to – love you. Bye-bye.

ETFs. Perhaps this week you've seen some of our analysis of ETFs. Perhaps you're thinking that's great, but what is an ETF?

Allow me to help. As with all things investing, you don't have to be good to start, but you do need to start to get good. An exchange-traded fund or ETF is an investment vehicle available to investors like you and I. It's essentially a basket. In that basket is a collection of securities. That basket might mirror a specific index or create a collection of, say, companies with a certain unifying theme. Remember when I said earlier this week that there's an ETF for everything these days? Well, that's why. ETFs make thematic investing in weird and wonderful ideas very, very easy indeed.

But back to that basket. Our basket is listed on an exchange and its performance will reflect the performance of the underlying assets. But unlike mutual funds which execute buy and sell orders outside of trading hours, ETFs can be bought and sold during the working day. As such, their share prices go up and down according to what is going on in the markets.

Sound exciting? Here's the bit where we talk about risk. ETFs can track some fairly mainstream indices which are full of different companies or instruments and therefore provide a good degree of diversification. But they can also be fairly concentrated on certain themes, perhaps more susceptible to volatility than you may realise. To that end, the launch of Bitcoin ETFs linked to the price of Bitcoin itself is an exciting development in the US. But it's also a figurative entry pass to a rollercoaster. As ever, make sure you get professional advice if you don't know what you're doing or if you're investing a sizable chunk of money. It could save you from an even more difficult phone call than the one I just had earlier. Thanks for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Ollie Smith

Ollie Smith  is editor of Morningstar UK

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