What is an ETF, really?
In short
- An ETF is a fund that bundles a group of investments and trades on the stock exchange.
- Many ETFs track an index, such as the AEX or a world index.
- An ETF spreads risk, but does not protect against falls in the whole market.
Imagine a grocery basket with a hundred products. You do not buy each product separately, you buy the whole basket at once. An ETF works like that, but with shares, bonds or other investments.
The name
ETF stands for exchange traded fund: a fund that trades on the stock exchange, just like a share. So you can buy and sell it during trading hours.
What is inside?
Many ETFs follow an index. An index is a list of companies, for example the 25 largest in the Netherlands (AEX) or thousands of companies worldwide. The ETF tries to copy that list. If you buy a world ETF, you indirectly own a very small piece of many companies.
What are the pros and cons?
- Spreading risk: if one company does badly, that is a small part of the basket.
- Costs: ETFs have annual costs, often low, but compare them. The figure is called the ongoing charge (TER).
- No protection against the market: if the whole market falls, so does your ETF.
- Differences: not all ETFs are the same. Some really own the shares, others use contracts. Read what the product does.
What it is not
An ETF is not a savings account and has no guarantee. The value can fall. This is an explanation of what an ETF is. It is not advice to buy an ETF or which one.
