What is Exchange-Traded Fund (ETF)?

Full Definition

An Exchange-Traded Fund (ETF) is a pooled investment fund, usually tracking an index such as the FTSE 100 or S&P 500, a sector, a commodity, or a bond index, that is listed and traded on a stock exchange in the same way as an individual company's shares -- meaning its price moves throughout the trading day, and it can be bought or sold via a normal share-dealing account or Stocks and Shares ISA. This differs from a traditional open-ended fund such as an OEIC or unit trust, which is priced and traded only once a day at a single valuation point. ETFs are popular for low-cost, diversified investing because most are passively managed trackers with lower ongoing charges than actively managed funds, though actively managed ETFs also exist. Physical ETFs hold the underlying assets directly, while synthetic ETFs use derivatives to replicate an index's performance -- a distinction worth understanding because synthetic ETFs carry additional counterparty risk. UK investors can hold ETFs inside an ISA or SIPP to shelter gains and income from Capital Gains Tax and Income Tax, and should check whether a given ETF has UK reporting fund status, since gains on non-reporting offshore funds are taxed as income rather than at the usually lower capital gains rates.

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