Please remember, investment value can go up or down and you could get back less than you invest.
What is an ETF?
ETFs - or exchange-traded funds - are investment funds that can be traded on stock exchanges in the same way as shares. Trading in ETFs is a way to track a broad basket of stocks using an index, such as the S&P 500 or FTSE 100.
Investors can also track a wide range of other asset classes such as bonds, property and currencies. To trade in commodities such as metals, energy and agriculture, investors can use ETCs – exchange-traded commodities – which work much the same way.
Why do people invest in ETFs?
ETFs are a simple way to invest in a wide range of companies without picking individual shares.
However, unlike an active fund or trust, ETFs are usually 'passively managed'. This means they track a predefined index of stocks, rather than trying to beat the market. As a result, ETFs usually have much cheaper fees.
Another benefit is that ETFs are traded on stock exchanges, meaning they can be bought and sold quickly throughout the day. Other types of funds can take longer to appear in your account.
Most popular ETFs
Below is a preview of the most purchased ETFs by ii customers over recent months. For more detailed insights and performance data, visit our top ETFs page.
Most purchased ETFs in Q1 2021
Source: interactive investor. Note: the top 10 is based on the number of “buys” between 1 January and 31 March 2021.
Why choose interactive investor to buy ETFs?
✔ We offer the widest choice – more than 40,000 UK & global investment options, including over 1,000 ETFs.
✔ We charge a low, flat fee of £9.99 per month. Most other investment platforms charge a percentage fee that grows with your investments.
✔ We give you a free trade every month. There are also no trading fees with our regular investing service.
Latest ETF News and Insights
Five-minute guide to exchange-traded funds
Exchange-traded funds (ETFs) are being promoted as a low-cost way of investing and have become more popular in recent years. But what are they all about and should you jump on the ETF bandwagon?
The ETFs Show: Roger Federer, Warren Buffett and passive investing
Tom Bailey’s guest is Buckingham Wealth Partners’ Larry Swedroe, author and passive investing advocate.
by Tom Bailey
The cheapest ETFs to track global markets at the start of 2021
Our guide to the cheapest ways to access global markets, including the UK, US and emerging markets.
by Tom Bailey
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How do ETFs work?
ETFs usually track a basket of stocks or other assets. To do this they track the performance of a specific index, most commonly available from companies such as FTSE or MSCI.
ETFs will provide the return of an index, minus their management fee.
There are two types of ETF structure: physical and synthetic. The difference is a physical ETF will actually hold an asset, while a synthetic ETF simply tracks the asset. The ETF issuer enters into a swap contract with a counterparty to provide a return equivalent to that from the underlying asset. With this comes what is known as counterparty risk. This is something to be mindful of as the company issuing the derivatives could go bust and therefore you might lose some of your money.
Types of Exchange-Traded Funds (ETFs)
ETFs now come in all shapes and sizes. The simplest are those that track long-established equity indices. There are also those that track bond market indices, a basket of commodities, baskets of currencies and property.
In recent years ETFs have become more niche. Investors can now find ETFs that offer exposure to increasingly specific baskets of equities or other assets.
Other ETFs track certain sectors within a wider index. For example, many popular ETFs track such such as the banks and financials sector in the S&P 500.
Some ETFs track certain themes. For example, a popular theme in recent years has been cloud computing. A cloud computing ‘thematic’ ETF will usually track a cloud computing index, which will comprise companies deemed to be involved in cloud computing.
Another ETF option is known as ‘smart beta’ in industry jargon. These ETFs do not track shares by market capitalisation, as a fund tracking, say, the FTSE 100 index would.
Instead, they actively decide which shares to track by targeting shares that possess certain characteristics. For example, some smart beta funds follow a basket of companies that are reliable dividend payers, while others target the highest-yielding shares on a particular index.
Main advantages and disadvantages when investing in ETFs
The primary advantage of ETFs is that they are low cost. Thanks to their unique structure and (usually) having no portfolio manager, they are much cheaper for investment houses to run. As a result, investors are charged less. Some popular ETFs charge as little as 0.05%, which works out at £5 on a £10,000 investment. There is no stamp duty to pay when you buy an ETF.
Another attraction is simplicity. Investors who buy an ETF opt to simply ‘buy the market’ and their returns will mirror how the index performs, minus fees.
Another key advantage of ETFs is that they offer access to previously hard to reach parts of the market for private investors. Prior to the invention of ETFs, investors would have struggled to find a way to gain exposure directly to the price of oil or be able to easily track a basket of value stocks.
The main disadvantage is that an ETF will (in vast majority of cases) not outperform the index it is tracking. Actively managed funds, run by fund managers, aim to provide outperformance, but there are no guarantees this will be achieved.
Are ETFs good for beginners?
Beginner investors should consider using an ETF to gain exposure to major stock market indices. Broad exposure to main markets such as the S&P 500 or FTSE All Share is viewed as a sensible core part of any beginner investors portfolio. ETFs provide a cheap and easy way to do this.
Do ETFs pay dividends?
ETFs that hold dividend paying stocks pay those out to investors.
Generally, ETFs pay out the dividends of the stocks they own on a quarterly basis.
ETF investors can receive the proceeds of their dividends in either cash or additional units in the ETF in question. Many investors chose to reinvest their dividends to increase their holdings, allowing their dividends to compound.
How do I invest in ETFs?
ETFs are listed on the London Stock Exchange, so you buy them through a platform like interactive investor. This means you need to factor in dealing costs.
Exchange-Traded Products (ETPs) including ETFs, ETCs and ETNs track a wide variety of underlying investments, some of which may be complex in nature and involve leverage, shorting or a high degree of volatility. It is therefore important that you read the Prospectus or Fact Sheet (available on the issuers' websites) prior to investing and ensure that you understand how it is structured and the associated risks.
Tax laws may change. If you have any queries on taxation in relation to your investments please speak to a qualified tax adviser. Please remember, the value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest.