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Some people are attracted to investing by the cut and thrust of the stock market, but for many investors the goal is simply to grow their cash over time in a way that beats inflation.
This latter group might be more attracted to the idea of exchange-traded funds, more commonly known by the acronym ETF. These offer a pre-made basket of securities to investors looking for a low-cost way of gaining exposure to assets.
Here, Telegraph Money will explain what ETFs are, how they work, and what risks you should be aware of. In this guide we will cover:
An ETF is a fund that pools investors’ money to buy a portfolio of financial assets, most commonly stocks and shares. Shares in an ETF are traded on an stock exchange like regular company shares, making it easy for individual investors to buy and sell.
Unlike mutual funds, this means the value of an ETF is priced in real time when the exchange is open, rather than only on a daily basis.
ETFs are usually passive funds, meaning they are not actively managed by a fund manager but are instead structured to track a specific index, industry or investment strategy.
For example, a FTSE 100 ETF will aim to replicate the performance of the FTSE 100 index.
When you buy shares in an ETF, your money is added to a collective pot of money that is then used to buy the underlying securities in the fund. This could include stocks and shares, bonds or physical assets like gold.
Most ETFs aim to replicate the performance of a specific sector or industry. The next section contains more information on the different types of ETFs.
If the value of the underlying assets increases, then the price of your shares in the ETF will also increase, generating investment returns when you sell them.