An ETF, or exchange-traded fund, is a pooled investment that trades on a stock exchange like a share. It usually tracks an index, commodity or basket of assets, and its price moves throughout the trading day.
In one line: An ETF is a pooled fund that trades on an exchange like a share and usually tracks an index throughout the day.
How an ETF works
ETFs are regulated investments overseen by the FCA and bought through a broker or platform. Most are passive index trackers with low ongoing charges, combining fund diversification with share-style trading.
For example, buying 100 shares of an ETF priced at 90 GBP costs 9,000 GBP plus any dealing fee, and the holding's value updates live as the market moves, unlike a once-a-day fund price.
Because ETFs trade on-exchange, a bid-offer spread and the platform's dealing charge apply to each transaction.
ETF vs an index fund
An ETF and an index fund can track the same index at low cost. The ETF trades live on an exchange with a spread and dealing fee, while an index fund prices once daily without a spread.
Frequent traders may prefer the ETF's flexibility; regular monthly savers often find a daily-priced index fund simpler and cheaper to drip-feed.
Primary source: FCA: Investing basics