What is an exchange-traded fund? The basics

An exchange–traded fund, or ETF, is a type of investment fund. It spreads your money, along with other investors’ money, across a range of investments.

ETFs may look similar to other funds, but there’s a key difference in how they’re traded. Unlike traditional funds (often called open–ended funds or OEICs in the UK), which are priced once a day, ETFs trade on a stock exchange. This means the prices of ETFs fluctuate throughout the day when the market is open, based on supply and demand.

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What are the benefits?

ETFs offer a variety of benefits, especially if you’re looking for a simple and flexible way to invest:

• Clear visibility – most ETFs publish their holdings daily, which means you can usually see what the fund invests in and how it’s performing.
• Cost efficiency – ETFs are often lower cost than actively managed funds, where a manager actively picks investments. They can also be a cost-effective way to invest in many companies at once.
• Flexibility – they’re traded on stock exchanges, so you can buy or sell ETFs during market hours. This gives you more control over the timing of your trades.
• Diversification – ETFs give you access to a wide range of assets. Spreading your money across a range of investments can help reduce the risk of relying on a single asset.

What do ETFs invest in?

ETFs span a wide variety of asset classes, such as shares, bonds or commodities. This can give you exposure to specific markets, sectors, or investment strategies.

What an ETF invests in depends on whether it’s actively managed or passively managed. 

An actively managed ETF has a fund manager in charge, who chooses investments with the aim of outperforming the market. 

Passively managed ETFs aim to track the performance of a specific index, like the FTSE 100 or the S&P 500.

How can I buy an ETF?

Similar to funds and shares, ETFs are usually available via investment platforms and can be traded during market hours.

When it comes to selecting an ETF, think about your goals, how much risk you’re comfortable with, and the fees you will pay.

ETFs are generally suited to long–term investing. You should be prepared to invest for at least five to ten years. This gives your investments more time to recover from market ups and downs, although returns are not guaranteed.

Are there costs?

ETFs usually have an annual fee, often called an ongoing charge. Actively managed ETFs tend to come with higher fees as they aim to beat the market, while passively managed ETFs usually cost less as they just follow the market rather than trying to beat it.

You may also pay trading fees when you buy or sell an ETF, depending on your platform or broker.

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Important information: investors should note that the views expressed may no longer be current and may have already been acted upon Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.