Learn more about an ETF in our 101 guide
Exchange-traded Funds, otherwise known as ETFs, have become increasingly prevalent in the investment world. If you haven’t heard of them before, not to worry, but you should probably at least have a good overview of how this investment product works.
If you have ever considered investing in one of the companies on the FTSE 100, or any other well-known index, filled with companies such as Facebook and Apple, you will appreciate how difficult it can be to invest. If you’d invested in Amazon around 10 years ago, you would have been able to buy a much higher number of shares than today — and you would probably also have retired by now. However, nowadays, with many companies’ shares prices rise and fall and it can often feel like you are not really getting much for your money. And that is exactly where ETFs come in.
ETFs provide investors with a relatively convenient way to gain exposure to a pool of investments without having to buy each one individually. So not only will you ‘get more for your money’, you will also be spreading out your risk by diversifying your investments. Essentially, ETFs own the underlying assets and divides ownership of those assets into a number of shares for purchase.
ETFs track a share index, such as the FTSE 100, or an asset class, such as a corporate, gold or government bond, enabling you to spread out your risk.. So if you have always wanted to invest in Facebook, Apple and Netflix because you think overall they will keep doing well, but aren’t willing to invest in each one individually to be worthwhile, then ETFs provide a way to do so.
Shareholders of an ETF are also entitled to a proportion of the profits, such as earned interest or dividends paid, and in certain circumstances they may also get a residual value in case the fund is liquidated. An ETF is considered to be tax efficient,cbecause buying and selling occurs through an exchange and the ETF sponsor does not need to redeem those shares each time an investor wishes to sell, or issue new shares each time an investor wishes to buy.
These funds are typically referred to as passive investments, as opposed to active investments, as they merely track the performance of an index, offering a simpler way to slightly diversify your portfolio in the world of investments.
It is always important to understand what you are investing your money into and we encourage everyone to build upon their financial knowledge. Read our other 101 guides and financial tips in our publication.
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