ETF Investing Guide: Types, Costs & How to Choose
What Are ETFs?
Exchange-Traded Funds (ETFs) are investment funds that trade on stock exchanges like individual shares. They typically track an index, commodity, sector, or other asset. Unlike mutual funds, you can buy and sell ETFs throughout the trading day at market prices.
ETFs vs Mutual Funds
Costs: ETFs are usually cheaper (0.03-0.50% vs 0.50-1.50%). Trading: ETFs trade instantly; mutual funds settle at end-of-day price. Minimum investment: ETFs can be bought one share at a time; mutual funds often have £500-1,000 minimums. Transparency: ETF holdings are published daily; mutual funds typically quarterly.
Main Types
Index ETFs: Track market indices like FTSE 100 or S&P 500. The most popular type. Bond ETFs: Track government or corporate bond indices. Lower risk than equity. Commodity ETFs: Track gold, oil, or other commodities. Sector ETFs: Focus on specific sectors like technology, healthcare, or clean energy. Thematic ETFs: Target trends like AI, robotics, or ESG investing.
Costs to Watch
Ongoing charges (OCR): The annual management fee (0.03-0.50%). Spread: The difference between buy and sell price. Platform fees: Your broker's annual charge (0.15-0.45%). Stamp duty: 0.5% on UK-listed ETFs (not applicable to most ETFs listed in Ireland/Luxembourg).
Building a Portfolio
A simple 3-fund portfolio covers most investors: global equity ETF (70-80%), global bond ETF (15-25%), and a cash/money market ETF (5-10%). Adjust the equity/bond split based on your risk tolerance and time horizon. Rebalance annually.
Related Calculators
Frequently Asked Questions
What is the difference between an ETF and an index fund?
An index fund is a type of mutual fund that tracks an index. An ETF also tracks an index but trades on a stock exchange like a share. Both offer low-cost passive investing, but ETFs offer intraday trading and often lower fees.
What is a good ETF for beginners?
A global equity ETF like Vanguard FTSE All-World (VWRL) or iShares Core MSCI World (SWDA) gives instant diversification across thousands of companies worldwide, with fees of just 0.12-0.22%.