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Exchange-traded funds (ETFs) explained

Access a wide choice of ETFs together with detailed information on individual funds

With investment, your capital is at risk.

Are you looking for exchange-traded funds (ETFs) to invest in? Bestinvest offers a big choice of ETF funds that you can add to an ISA, Junior ISA, SIPP or Investment Account.

Using Bestinvest’s comprehensive investment search tool, you can:

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What is an ETF?

An ETF works a bit like a stock and a bit like a fund. You can buy shares in an ETF on the stock market and its price will rise or fall depending on its performance.

An ETF is a basket of assets such as individual stocks or bonds. They typically passively track the performance of a commodity or stock market index such as the FTSE 100, or they can be more focused, tracking something like Chinese energy companies or US e-commerce firms. ETFs can also be actively managed, regularly adding in new stocks and shedding others.

What they provide is diverse, low-cost exposure to new markets, assets, or sectors without you having to buy them individually.

ETFs can be high risk and complex and may not be suitable for retail investors, so you should make sure you understand all the risks involved before investing.

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Investments explained

ETFs or Exchange Traded Funds are funds that are traded on the stock market every day like shares. They can be passive in that they track the performance of a particular index or sector or actively managed where the manager can buy and sell holdings when they see an opportunity to boost returns.

According to Statista there were 7,602 ETFs to choose from around the world in 2020. They come in all shapes and sizes covering equities, bonds, commodities, and sectors/themes such as e-commerce and rare earth metals.

You can buy an ETF in much the same way as you would purchase shares: via a broker or investment platform like Bestinvest. You don’t need to break the bank as the minimum amount of investment required tends to be low. All you need is to have enough money to at least buy one share as well as to cover fees or commission from the provider.

As with buying a single stock you need to consider factors such as the ETF’s track-record of returns and charges. You should also analyse its level of assets, trading activity and the strength of the underlying index or asset it is tracking. Then it’s a case of finding an ETF that suits your investment strategy be that value, growth or diversified and/or tracks a sector you have knowledge or interest in such as video games. Markets full of household names like the FTSE 250 are another popular option.

Yes, if the underlying stocks within the fund pay out dividends. If you have an Inc ETF then it goes straight into your bank account and if you have an Acc version it goes back into the fund. Investors will receive a dividend payment usually semi-annually or quarterly.

There are obvious risks in that the ETF’s share price can go up or down depending on the strength or otherwise of the index, asset, or sector it is tracking and you may not get back the amount invested. However, ETF’s, because of the valuable built-in diversification you get from having a basket of holdings, are less risky than buying individual shares. You can further limit risks by diversifying your portfolio of ETFs with different sectors or markets.

Some ETFs can be high risk and complex and may not be suitable for retail investors, so you should make sure you understand all the risks involved before investing.

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