What is an ETF?

You’ve probably heard the expression ‘don’t put all your eggs in one basket’, a warning about investing too much in one particular area over others. An exchange-traded fund (ETF) takes that expression literally as it packages a number of securities into one bundle that can be traded on an exchange just like stocks.

ETFs can contain all sorts of investments from stocks and bonds to commodities with holdings varying in focus from US-only to international offerings. The SPDR S&P 500 (SPY) is the oldest surviving and most widely known ETF that tracks the S&P 500 Index.

The idea behind an ETF is by spreading your investment across several assets you lower your level of risk. The FTSE 100 of the 100 top-performing companies in the UK, for example, gained just over 13% between January 2021 and January 2022. So an ETF that invests in all 100 of these funds would have returned you a 13% profit. If you had only opted for one of the companies instead, like Vodafone for example, your investment would barely have changed, as the share price is almost exactly the same in January 2022 as it was in January 2021.

Did you find this useful?