ETFs are fast becoming the vehicle of choice for many investors because of their low costs, simplicity and exposure to different markets.
An ETF trades very much like a regular stock on a stock exchange, such as the London Stock Exchange. Like stocks, ETFs experience price changes throughout the trading day as they are bought and sold.
Where an ETF differs is in its composition. Each ETF is made up of a wide range of stocks and other investments that track anything from stock indices to stock market sectors, commodities, currencies and bonds.
As an example, a FTSE100 ETF is designed to closely track the FTSE100 stock market index – made up of the 100 largest UK firms listed on the London Stock Exchange. Like all index-tracking ETFs, its price movement will aim to mirror that of the index it follows.