I'm interested in ETFs 🧺
The financial world is awash with abbreviations, and one such you’ve probably heard of is ETFs. ETFs have become an increasingly popular choice among investors over the past decade, looking to build a diversified but low-cost portfolio - but have you ever wondered what they are? We’ll cover exactly that below.
What are ETFs?
An exchange-traded fund (ETF) is an investment fund that trades on a stock exchange, just like stocks and shares. They’re designed to track the performance of a particular index, such as the FTSE 100, or a specific sector, such as the technology sector, healthcare, or financial services sector.
How do ETFs work?
Financial institutions create ETFs by pooling investor money to purchase a basket of multiple different shares, bonds, or other assets that match a certain investment focus. Investors can then buy the ETF and gain immediate exposure to a multitude of shares, for example, in one ETF, instead of buying a handful of individual shares.
What are the advantages of ETFs?
Diversification
The nature of ETFs means investors gain instant diversification as they buy a collection of assets in one go, as opposed to investing in them one at a time, individually. Diversification can be an effective way to reduce risk while maximising potential returns.
Low cost
It’s usually much cheaper, and quicker to buy an ETF, than buy the underlying holdings of the ETF individually, one at a time. This is particularly the case when it comes to investment platforms that charge trading fees, where instead of paying x4 sets of fees for buying shares such as Barclays, HSBC, NatWest, and Lloyds, you could buy one ETF that holds the very same shares and only have to pay trading fees once.
Similar to shares
ETFs trade on stock exchanges like the London Stock Exchange, or NASDAQ in the same way shares of companies do. This means you can buy, sell, and hold ETFs in pretty much the same way.
Transparency
When it comes to ETFs you can always see what the underlying investments in the ETF are and in what proportion. This isn’t always the case in some investment instruments, like a managed fund, where it can be up to the fund manager whether or not to disclose holdings.
Plum
✅ £1 minimum deposit
✅ AI powered money management
✅ Stocks and shares, ETFs and more
Plum is the smart money app that can help you budget, save and invest, using automation. Plum's AI adapts to your income and spending so you can be prepared for whatever life throws your way. Join with Pluto and get a £5 cashback! T&Cs and fees apply, capital at risk.
To earn your £5 cashback -> head to ‘find out more’, open an account with Plum. Have an active account (an account with minimum £0.01) after 90 days to recieve £5 cashback. T&Cs and fees apply, capital at risk. The value of investments can go down as well. Do not invest money you cannot afford to lose. Pluto may receive a commission from the provider, at no cost to you.
What are the disadvantages of ETFs?
Fees and commissions
While we’ve just praised the cost effectiveness of ETFs it is important to note each one is different. Costs can vary greatly between ETF providers and the platforms you use to access them. ETFs may also include commissions, management fees, and other expenses that can lower your returns.
Liquidity
This essentially means, how readily and easily an asset, like an ETF in this case, is bought and sold. Not all ETFs share the same level of liquidity, so it can take longer than expected in some cases to buy and sell your holdings. This isn’t ETF exclusive however, all asset classes and types have different liquidity and it is an important factor to consider in your investing.
Capital risk
As with all financial investments, investing in ETFs involves real risk. Prices of ETFs can go down as well as up and you could end up with less than you started with.
Lightyear
✅ 3500+ US, UK and EU stocks and ETFs
✅ No execution fees for ETFs
✅ Uninvested cash earns 4.5%* interest
Lightyear does things differently - they are investing with an edge. Using Lightyear is a simple and approachable way to invest your money internationally without unnecessary barriers or fees, all through an easy-to-use app. Join with Pluto and get a £10 fractional US stock with promo code 'Pluto' and a £50 deposit. T&Cs apply, capital at risk.
To earn your £10 fractional US stock -> head to ‘find out more’, open an account with Lightyear, deposit £50 and type in promo code ‘Pluto’. T&Cs apply. The value of investments can go down as well. When you invest, your capital is at risk. Some of the content of this website is of a promotional nature and includes financial promotions. Pluto may be paid a referral fee by Lightyear when you click on the links on this page.
*In USD, as of 27/09/2023.
What type of ETFs are there?
Industry sector ETF
This type will give investors exposure to a range of shares in specific sectors. A technology ETF, for example, could be a basket of Meta, Amazon, and Apple stock - thus giving an investor broad tech market exposure, through a single investment in the given ETF.
Commodity ETFs
These types of ETFs can include a specific commodity such as a Gold ETF, just holding gold-related companies, solid gold and or gold derivatives, or multiple commodities such as a precious metals ETF, that may hold gold, silver, and palladium.
Inverse relationship
Inverse ETFs, or Short ETFs are designed to perform inversely to the index they track. For example, an inverse FTSE 100 ETF, would track the FTSE 100 index with inverted (opposite) returns. So, if the FTSE fell, the ETF would rise by about the same percentage, and so on.
interactive investor
✅ £1 minimum deposit
✅ Investing account, ISAs and SIPPs
✅ Monthly flat-fee
interactive investor is an award-winning investment platform. They're the UK’s number one flat-fee investment platform, enabling you to easily manage ISAs, SIPPs, trading and more.
If you invest, capital is at risk. The value of investments can go down as well as up and you may receive back less than your original investment. Pluto may receive a commission from the provider, at no cost to you.
Where can I invest in ETFs?
Given the popularity of ETFs, you can access them on most investment platforms that offer share dealing and investing. Not all providers do offer access, so make sure to double-check this before opening an account.
Before you invest in ETFs
Before making any investments, you must understand the risks involved and only invest money you can afford to lose. Do your research or consult with a qualified financial advisor if you need expert support.
What’s the bottom line?
ETFs are an effective, straightforward way to build diversity into your investment portfolio, as you get exposure to a whole range of assets in one go. They are a popular choice for beginner and advanced investors alike, although, like with all investing, it is important to do your research and know the risks before investing in ETFs.
eToro
