An ETF — Exchange-Traded Fund — is a type of investment fund that holds a collection of assets (typically stocks, bonds, or commodities) and can be bought and sold on a stock exchange, just like individual shares. They have become one of the most popular investment vehicles in the world, offering diversification, low costs, and simplicity in a single product.
The simplest ETFs track an index. A FTSE 100 ETF, for example, holds shares in all 100 companies in the FTSE 100 index, in the same proportions as the index. When the FTSE 100 rises by 1%, the ETF rises by approximately 1%.
The key differences from mutual funds come down to how they trade and how they are priced. A traditional mutual fund is priced once a day, at the close of the market. When you buy or sell, your order is executed at that end-of-day price, regardless of when you placed it. An ETF, by contrast, trades continuously throughout the day on a stock exchange. You can buy at 9:30am and sell at 3:30pm at different prices, just as you would with a share.
This intraday tradability makes ETFs more flexible than mutual funds, and it also means ETF prices are slightly more transparent — you can see exactly what price you are buying and selling at.
Cost is another significant difference. Index ETFs, because they simply replicate an index mechanically rather than requiring active research and stock selection, can charge very low annual fees. Many popular index ETFs charge 0.05-0.20% per year. Active mutual funds, which employ fund managers to select stocks, typically charge 0.5-1.5%.
Both ETFs and mutual funds offer diversification and professional administration. For most investors, the choice comes down to cost, flexibility, and whether they want active or passive management.