What is an ETF?

A beginner’s guide to the wonderful world of ETFs

Alanna Petroff 20 September, 2012 | 10:04AM

What is an ETF?

An Exchange-traded fund (ETF) is an index-tracking fund. ETFs are generally used to track the performance of a specific market index and they change in value throughout the trading day as they mimic the performance of their designated index. Essentially, an ETF is a collection of investments that are bundled together into a single entity and traded just like a stock on an exchange. 

For example, if you want to invest in the overall FTSE 100 Index, you can buy an ETF that will mimic the movements of the FTSE 100. When the FTSE 100 goes up, your ETF will increase in value. When the FTSE 100 goes down, your ETF will decrease in value. You can also buy ETFs to track other benchmark indices such as the FTSE 350, the S&P 500 or the NASDAQ 100, or smaller niche indices.

ETFs can also be used to track commodity prices and various other assets. For example, if you want to invest in gold but don’t want to buy a bar of gold, you can buy a Gold ETF that will track the price of the shiny metal. (Technically, this kind of commodity ETF is called an Exchange-Traded Commodity, but that requires a more detailed explanation, which can be found in A Beginners Guide to Different ETF Categories.”)

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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.

About Author

Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.

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