A Beginner's Guide to ETFs

Let's go back to basics and start at the beginning of ETF--or ETP--investing

Holly Cook 2 November, 2011 | 6:07PM
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The emergence of exchange-traded funds (ETFs) has gone from strength to strength since their introduction in the U.K. a few years ago, and Morningstar's ETF analysts have been there every step of the way to provide education, direction and independent research. But many investors are still wary of these securities, not least because of the bad press they've received of late in regard to transparency and even the advent of the odd 'rogue trader'.

So let's take it back to basics: What is an ETF?

At the most basic level, ETFs are just what their name implies: baskets of securities that are traded, like individual stocks, on an exchange such as the London Stock Exchange. Unlike OEICs and unit trusts, ETFs can be bought and sold throughout the trading day. They can also be sold short and bought on margin, or using stop-loss orders--in brief, anything you might do with a stock, you can do with an ETF.

One of the key advantages of an ETF (or another exchange-traded product such as an exchange-traded note or exchange-traded commodity) is that they tend to charge lower annual expenses than even the least costly traditional tracker funds. However, as with stocks, you must pay a commission to buy and sell ETF shares, which can be a significant drawback for those who trade frequently or invest regular sums of money. As such, Morningstar has spent much time warning individual investors against trading frequently in ETFs and instead highlighted their cost advantages.

Here are some quick links to more in-depth information on ETFs and their exchange-traded counterparts:

ETFs: Active vs. Passive & Physical vs. Synthetic 
A look at how different ETFs are created and operate differently, which affects investment returns

A Beginner’s Guide to Different ETF Categories
A look at the other ETFs, which track commodities and currencies

Taxes and ETFs: A Guide for British Investors
Understanding how ETFs are taxed is crucial to creating an effective investment strategy

Understanding Morningstar’s ETF Ratings
Learn how to use Morningstar's ETF Star Ratings to help you make better investment decisions

The History of ETFs
Worldwide assets under management in exchange-traded products (ETPs) have seen explosive growth over the past decade. But where did they come from? This article examines the origins of ETPs.

Are ETFs Right for You?
A guide to investing in exchange-traded funds.

The Pros and Cons of ETFs
Understanding the role of exchange-traded funds.

The Difference Between an ETF and ETP:
-- Part I The definition behind the acronym
-- Part II The structure of ETFs
-- Part III Exchange-traded commodities and notes

Morningstar ETF Education Centre Our step-by-step slide show on these products and their uses.

Keep up to date with the latest Morningstar ETP Research and search our database for ETPs that suit your portfolio's needs. We also host monthly interactive ETP webinars online, so be sure to join in with the next one, or catch up on previous webinars. Don't forget to sign up for our ETP newsletter to receive all of this direct to your inbox.

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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About Author

Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites

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