What is an ETF?

ETF stands for ‘exchange traded fund’, which is an investment fund listed like a stock on the main international exchanges around the world. ETFs are typically created to allow investors to trade securities which are either difficult or expensive for retail investors to do themselves. ETFs may contain shares, bonds, commodities or a combination of these.

For example, there is an ETF called QQQQ which was created to replicate the performance of the Nasdaq marketplace as a whole. In order for a retail investor to do this themselves would require them to buy and constantly rebalance the entire index which is over 2800 different companies! This is cost-prohibitive, so an ETF allows quick and easy trading of the entire Nasdaq as if it were a single share. Similarly there are ETFs for the S&P 500 (SPY) and Gold (GLD) along with hundreds of other smaller niches and sectors.

The creators of ETFs take a small percentage of the total size of the fund for expenses and fees. These costs typically range from 0.2% to 1% for the more exotic ETFs. iShares are the world’s biggest provider of exchange traded funds.

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