Learn all there is to know about exchange-traded funds, including what an ETF is

Exchange-traded funds (ETFs) come in a variety of forms and can offer investors a broad range of financial options

We describe ETFs and their operation.

One essential piece of the toolkit for contemporary investors is exchange-traded funds, or ETFs. These straightforward products, which are becoming more and more popular, can provide investors with a vast array of choices.

Fidelity International's analysis of etfbook . com data shows that the European ETF market saw inflows of more than £56 billion in January 2026.

Neil Davies, Head of ETF Product and Capital Markets, Europe and APAC at Fidelity International, stated, "ETFs continue to be a source of stable growth even as we continue to move from one geopolitical crisis to the next."

Exchange-traded funds, or ETFs, are funds that are purchased and sold on stock exchanges, as the name implies. Because of this, their prices fluctuate in real time, just like stocks do, rather than at the end of the day. Investors can purchase them at their current price whenever the stock market opens.

Both active and passive ETFs are available.

Passive ETFs invest in a benchmark index to track the performance of a particular sector. They aim to replicate their benchmark's returns precisely rather than to surpass it. Though active ETFs are becoming more and more popular, these have historically been the most prevalent type of ETF.

Tom Bailey, Head of ETF Research at HANetf, tells BFIA, "The debate around ETFs vs. mutual funds has historically been a proxy for the active vs. passive debate." But the emergence of active ETFs has altered this.

Active ETFs, also known as actively managed ETFs, have a portfolio manager who modifies the securities allocation in the fund in an effort to outperform the benchmark index, if one exists at all.

Over 2025, the value of assets held in European ETFs rose by 49%, from 52.5 billion to 78.4 billion, according to research firm Morningstar.

Different ETF types.

ETFs are available for practically any purpose, just like any other kind of fund. There are ETFs (or comparable products like ETCs) for currencies, bonds, and commodities, and some (referred to as multi-asset ETFs) invest in a variety of asset classes.

There are several different types of ETFs within stocks. To invest in a specific area or region, for instance, you could use an exchange-traded fund (ETF). For instance, the Franklin FTSE Asia ex-China ex-Japan UCITS ETF (LON:FRQX) offers exposure to Asian nations other than China and Japan.

Alternatively, you could invest thematicallythat is, in a specific industry or themeusing an ETF. The iShares MSCI Global Semiconductors UCITS ETF (LON:SEMI), which invests in an index of semiconductor and semiconductor equipment manufacturers, is an example of a sector-focused exchange-traded fund.

How are ETFs operated?

ETFs are valued according to their net asset value, or NAV, which is the sum of their cash and holdings.

A mechanism keeps the price of an ETF in line with the assets it tracks, even though theoretically it could deviate from its NAV if investors purchase or sell it in excess of the total of its individual holdings. Simply put, authorized partners promptly correct any discrepancy by adding or removing new ETF units when their price deviates from NAV.

This contrasts with other funds, like investment trusts, which can deviate more from their NAV because they have a set number of shares from the beginning.

Benefits and drawbacks of ETFs.

Investors love ETFs for a number of reasons. These consist of:

Tax efficiency: ETFs can be held in a stocks and shares ISA, protecting your investment from the taxman; Low costs: ETFs, especially passive ones, tend to have relatively low fees compared to other types of funds; Transparency: Thematic ETFs provide investors with a convenient way to gain exposure to a sector or theme while diversifying and rebalancing their investment across multiple securities; Transparency: ETFs publish their holdings daily, whereas mutual funds and close-ended funds aren't required to and typically only publish their holdings quarterly. ETFs also offer advantages over mutual funds because they are traded in real time on exchanges. Bailey states that it "provides greater flexibility and real-time pricing" and that in an on-demand world, mutual fund end-of-day pricing and the requirement for advance orders "seem archaic."

Nonetheless, investors ought to take into account the possible disadvantages of ETFs.

Over the long run, passive ETFs will never beat their benchmarks. Active ETFs may beat their benchmark, but they may also fall short of it. The long-term goal of ETFs is to accomplish a particular investment goal. Since their performance can deviate from their benchmark over shorter time periods, they are not appropriate for short-term trading.

What is the difference between ETFs and ETCs?

Although it tracks the price of a particular commodity, an exchange-traded commodity (ETC) functions very similarly to an exchange-traded fund (ETF).

This is slightly different from a commodity-focused ETF, which typically invests in stocks of businesses that are directly exposed to a commodity (like copper miners) in order to track changes in its price. Even though the returns they generate might be comparable, the underlying mechanism differs.

But aside from that, ETCs and ETFs are very similar. They provide commodity investing to regular investors without requiring them to use sophisticated tools like futures or options.

ETF investing tips.

Convenience is one of the best features of ETFs. Opening one of these is the best way to start investing in ETFs if you don't already have one because they can be purchased and held in a stocks and shares ISA, just like stocks.

But before you buy, think about the kind of ETF you want to purchase and look into the different options. Before choosing which ETF to invest in, compare options from various providers to evaluate factors like fees and the ETF's strategy and holdings. Typically, for any given sector or asset class, there are multiple ETFs available.

ETF examples.

A passive fund that tracks a significant index could be a good place to start if you're new to ETF investing.

These are a few instances.

There are three UCITS ETFs that track the S&P 500: the Vanguard SandP 500 UCITS ETF (LON:VUSA); the Invesco FTSE 250 UCITS ETF (LON:S250); and the iShares NASDAQ 100 UCITS ETF (LON:CNDX), which tracks the Nasdaq 100. Investors who are more assured may wish to include ETFs in their portfolio to increase their exposure to a particular industry or asset class. ETFs that might be utilized in this manner include the following.

For example, the L&G ESG GBP Corporate Bond UCITS ETF (LON:GBPC) provides exposure to the sterling-dominated investment grade corporate bond market by tracking the J.P. P. Gold spot price tracking is provided by the Royal Mint Responsibly Sourced Physical Gold ETC (LON:RMAU) and the Morgan GCI ESG Investment Grade GBP Custom Maturity Index. Holders of this physical ETC issued by the Royal Mint can trade their shares for gold coins or bars that the Mint stores and that are sourced responsibly.

Can a UK citizen purchase US ETFs?

UK-based investors may wish to use exchange-traded funds (ETFs) to monitor the performance of US stocks or indices. Although US regulations prevent investors from the UK from purchasing US-listed funds, the UCITS legislation provides a workaround. As long as the funds have the UCITS designation, European investors are permitted to purchase US-listed funds under the UCITS (Undertakings for Collecting Investment in Transferable Securities) regulatory framework.

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