What is an ETF? | How do ETFs Work | Barclays Smart Investor (2024)

Hello, I'm Clare and welcome to Smart Investor the show that can help you get the most from your investments.

Please be aware that although we can't offer personal advice we're hoping each episode will provide you with the insight you need to make you a smarter investor.

Funds are a good option for many people looking to invest because your money is pooled with that of other investors and then used to invest in a range of different assets often shares or bonds.

This gives greater diversification than if you were to invest yourself in the shares or bonds of individual companies and it can help reduce the risk you're taking.

However, there are different types of funds.

Some are actively managed, which means a fund manager will choose what to invest in and when to buy and sell.

Others are passively managed which means they mirror a stock market index or basket of assets and the performance follows that of the index they're tracking.

Today we're looking at Exchange Traded Funds - ETFs which are a type of passive investment.

I'm joined by Joe Parkin from BlackRock, the investment firm.

Joe, thanks for joining us.

Can you explain what an ETF is?

Yeah, sure.

An ETF, or Exchange Traded Fund is a simple and easy way to get access to investment markets.

It is a pre-defined basket of bonds, stocks or commodities that we wrap into a fund and then we list onto the exchange so that everyone can use it.

It's a very, very effective way of getting access to a large number of stocks, bonds or commodities in one simple transaction.

They're also pretty new.

What they do is, they allow all investors of all types the ability to invest in global markets without having to do huge amounts of analysis on individual stocks bonds, funds, or potentially go through an advisor.

So there's a large choice.

What can people invest in via an ETF?

ETFs have certainly democratised the way people invest.

It's also given them the ability to invest in countries, regions themes, sectors and all asset classes with one simple transaction.

I think the key to point out is, because it's a passive fund it will only ever track and it will never beat the.

The benchmark is definitely at the core of every single ETF.

This benchmark is pre-defined.

Then what we do is, we then go and track that index.

What you'll get is the performance of the index minus the cost of us running the portfolio.

This differs to an active manager who always tries to beat the benchmark over a period of time but typically charges higher costs in order to do that.

What role can they play in an individual's portfolio?

ETFs can play many roles in an individual's portfolio.

One of the things to realise first up is that ETFs and active funds can co-exist in the same portfolio.

I think actually they work very well in the same portfolio and can complement themselves to build better portfolios.

In terms of the ETF there are three key areas we see individuals using them in their portfolios.

The first is a core holding.

At a relatively low cost, you can get access to global equity or bond markets.

Secondly, they can be used tactically to take advantage of a market event or a political situation.

And finally, they can be used to diversify your portfolio.

Typically, active fund managers are concentrated within their own market or sector.

An ETF provides diversification to that active manager and helps you to build a better portfolio.

So regardless of the investor and their experience an ETF, if somebody is looking to invest, is something worth considering?

Most definitely.

ETFs are just another tool investors use to build better portfolios in the same way they use equities, bonds and funds.


Thank you very much for that, Joe.

If you'd like more information about ETFs or other types of funds please visit our website.

Thanks for watching and we'll see you next time.

What is an ETF? | How do ETFs Work | Barclays Smart Investor (2024)


What is an ETF? | How do ETFs Work | Barclays Smart Investor? ›

Yeah, sure. An ETF, or Exchange Traded Fund is a simple and easy way to get access to investment markets. It is a pre-defined basket of bonds, stocks or commodities that we wrap into a fund and then we list onto the exchange so that everyone can use it.

Is it smart to just invest in ETFs? ›

If you're looking for an easy solution to investing, ETFs can be an excellent choice. ETFs typically offer a diversified allocation to whatever you're investing in (stocks, bonds or both). You want to beat most investors, even the pros, with little effort.

What is an ETF and how does it work? ›

ETFs or "exchange-traded funds" are exactly as the name implies: funds that trade on exchanges, generally tracking a specific index. When you invest in an ETF, you get a bundle of assets you can buy and sell during market hours—potentially lowering your risk and exposure, while helping to diversify your portfolio.

Is there a downside to investing in ETFs? ›

What's the Biggest Risk of Owning an ETF? The greatest risk for investors is market risk. If the underlying index that an ETF tracks drops in value by 30% due to unfavorable market price movements, the value of the ETF will drop as well.

What do you actually own with an ETF? ›

Exchange-traded funds work like this: The fund provider owns the underlying assets, designs a fund to track their performance and then sells shares in that fund to investors. Shareholders own a portion of an ETF, but they don't own the underlying assets in the fund.

Is ETF good for beginners? ›

The low investment threshold for most ETFs makes it easy for a beginner to implement a basic asset allocation strategy that matches their investment time horizon and risk tolerance. For example, young investors might be 100% invested in equity ETFs when they are in their 20s.

Can ETFs make you money? ›

Some exchange-traded funds, or ETFs, can provide a potential income stream that may offer more diversification than investing in just one stock. Whether you're reorganizing your portfolio for your golden years or just starting to research income-oriented funds, you might want to consider this investment type.

What is an ETF for dummies? ›

A cross between an index fund and a stock, they're transparent, easy to trade, and tax-efficient. They're also enticing because they consist of a bundle of assets (such as an index, sector, or commodity), so diversifying your portfolio is easy. You might have even seen them offered in your 401(k) or 529 college plan.

How does an ETF pay you? ›

ETF issuers collect any dividends paid by the companies whose stocks are held in the fund, and they then pay those dividends to their shareholders. They may pay the money directly to the shareholders, or reinvest it in the fund.

When you buy an ETF, where does the money go? ›

An exchange-traded fund, or ETF, allows investors to buy many stocks or bonds at once. Investors buy shares of ETFs, and the money is used to invest according to a certain objective. For example, if you buy an S&P 500 ETF, your money will be invested in the 500 companies in that index.

How many ETFs should I own? ›

Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.

Is it better to buy individual stocks or ETF? ›

Stock-picking offers an advantage over exchange-traded funds (ETFs) when there is a wide dispersion of returns from the mean. Exchange-traded funds (ETFs) offer advantages over stocks when the return from stocks in the sector has a narrow dispersion around the mean.

Are ETFs really better than mutual funds? ›

But they have some key differences, in particular, how expensive the funds are. Overall, ETFs hold an edge because they tend to use passive investing more often and have some tax advantages. Here's what differentiates a mutual fund from an ETF, and which is better for your portfolio.

Is my money safe in an ETF? ›

Summary. ETFs are not less safe than other types of investments, like stocks or bonds. In many ways, ETFs are actually safer, for instance thanks to their inherent diversification. And by choosing the right mix of ETFs, you can control the market risk to match your needs.

Can you take money out of ETFs? ›

In order to withdraw from an exchange traded fund, you need to give your online broker or ETF platform an instruction to sell. ETFs offer guaranteed liquidity – you don't have to wait for a buyer or a seller.

Do I own stock if I buy ETFs? ›

ETFs do not involve actual ownership of securities. Mutual funds own the securities in their basket. Stocks involve physical ownership of the security. ETFs diversify risk by creating a portfolio that can span multiple asset classes, sectors, industries, and security instruments.

Should I put all my money into ETF? ›

You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.

Is it wise to only invest in the S&P 500? ›

Meanwhile, if you only invest in S&P 500 ETFs, you won't beat the broad market. Rather, you can expect your portfolio's performance to be in line with that of the broad market. But that's not necessarily a bad thing. See, over the past 50 years, the S&P 500 has delivered an average annual 10% return.

Is it better to invest in ETFs or mutual funds? ›

The choice comes down to what you value most. If you prefer the flexibility of trading intraday and favor lower expense ratios in most instances, go with ETFs. If you worry about the impact of commissions and spreads, go with mutual funds.

Do you pay taxes on ETFs if you don't sell? ›

At least once a year, funds must pass on any net gains they've realized. As a fund shareholder, you could be on the hook for taxes on gains even if you haven't sold any of your shares.


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