An ETF (Exchange Traded Fund) is a fund listed and traded on a stock exchange that tracks an index, commodity, currency, or sector. Unlike traditional mutual funds, ETFs trade throughout the day just like stocks. They combine the benefits of diversification with the flexibility of share trading and typically carry far lower management fees than actively managed funds.
What is an ETF? — Guide to exchange-traded funds
The ETF was created in the United States in 1993 (SPDR S&P 500 ETF Trust, ticker SPY) and has since grown into one of the dominant savings instruments globally. As of 2024, an estimated $13 trillion is held in ETFs worldwide (Source: ETFGI, 2024). ETFs are available through virtually all major online brokers and can be held in tax-advantaged accounts where they are available.
How does an ETF work?
An ETF holds a basket of underlying assets — stocks, bonds, commodities, or currencies — and issues shares representing a proportional stake in that basket. The shares trade on an exchange exactly like stocks: the price fluctuates throughout the day based on supply and demand.
The structure is maintained via a system of authorised participants (typically large banks and market makers) who can create or redeem ETF shares against the underlying assets. This mechanism keeps the ETF price close to its calculated net asset value (NAV).
Types of ETFs
Index ETFs
Track a market index — such as the S&P 500, MSCI World, or FTSE All-World. Passively managed: the fund buys and holds the index components in proportion. Low fees, typically 0.03–0.20% per year.
Commodity ETFs (ETCs)
Track commodity prices — gold, silver, oil, copper, and more. Can be physically backed (the fund holds the actual metal) or synthetic (uses derivatives). Physically backed gold ETFs such as iShares Gold Trust (IAU) and SPDR Gold Shares (GLD) hold real gold bars in secure vaults, giving gold price exposure without the logistics of physical ownership. Track live gold prices at guldpris.nu and silver at silver.nu.
Bond ETFs
Hold a basket of government or corporate bonds across varying maturities. They deliver bond-market characteristics (defensive, interest-rate sensitive) combined with the intraday liquidity of a stock exchange.
Thematic and sector ETFs
Focus on a specific sector (technology, healthcare, energy) or investment theme (clean energy, AI, cybersecurity). Higher concentration risk than broad index ETFs, but offer targeted exposure to a particular thesis.
Currency ETFs
Provide exposure to currency movements. Used to hedge currency risk or speculate on exchange rate shifts. A niche product — generally not suitable for passive long-term savings.
Advantages of ETFs
- Diversification: a single ETF can provide exposure to hundreds or thousands of assets
- Low cost: the Total Expense Ratio (TER) of broad index ETFs is typically 0.03–0.25% per year, versus 1.0–2.0% for actively managed funds
- Liquidity: traded throughout the exchange day — easy and fast entry and exit
- Transparency: an ETF's holdings are published daily
- Tax efficiency: in most jurisdictions, ETFs generate fewer taxable events than actively managed funds due to the in-kind creation/redemption mechanism
Risks and disadvantages
- Bid-ask spread: a small spread is incurred on every buy and sell — a hidden cost on top of the TER
- Tracking error: the ETF may not perfectly replicate its index due to transaction costs, tax effects, and rebalancing lags
- Synthetic ETFs: those using derivatives carry counterparty risk against the swap provider
- Thematic ETFs: high concentration risk — if the theme underperforms, the ETF does too
How to buy ETFs
ETFs are purchased through a stockbroker with access to the exchange where the ETF is listed. Key considerations by region:
- US investors: Commission-free ETF trading is available at Charles Schwab, Fidelity, and TD Ameritrade. Interactive Brokers offers the widest international selection.
- European investors: UCITS ETFs listed on Euronext, Xetra (Frankfurt), or the London Stock Exchange are available via platforms such as DEGIRO, Trading 212, and Interactive Brokers.
- Nordic investors: Nordnet and Avanza offer broad ETF access across Nasdaq Nordic and major European exchanges.
Key things to check before buying:
- TER (annual management fee) — lower is better for passive strategies
- Physical vs synthetic — prefer physically backed ETFs for commodity exposure where possible
- Accumulating vs distributing — accumulating ETFs automatically reinvest dividends; distributing ones pay them out. The right choice depends on your tax situation.
- Domicile — US investors should use US-domiciled ETFs; EU investors should use UCITS-registered ETFs to benefit from EU regulatory protections
Frequently asked questions about ETFs
Are ETFs better than mutual funds?
Passive ETFs are generally cheaper than actively managed funds and outperform them on average over the long term — a well-documented finding confirmed annually by the S&P SPIVA report. Active funds can deliver excess returns if the manager is skilled and the market is inefficient, but active managers beat their benchmark less frequently over longer time periods.
Can I lose everything in an ETF?
A broad index ETF could theoretically fall to zero if every company in an index went bankrupt — an extremely unlikely scenario. More realistically, a broad global index ETF can temporarily lose 30–50% of its value during a severe market crisis, as in 2008–2009 or spring 2020. Historically, markets have recovered and gone on to set new all-time highs.
What is the difference between an ETF and an index fund?
Both typically track an index, but traditional index funds trade at end-of-day net asset value, while ETFs trade continuously throughout the exchange day. Cost-wise they are often comparable. Index funds offered by Vanguard, BlackRock (iShares), and Fidelity are popular alternatives to ETFs for passive investors who do not need intraday trading.
Do ETFs pay dividends?
Yes. There are two types: distributing ETFs pay dividends directly to shareholders, while accumulating ETFs automatically reinvest dividends back into the fund. The right choice depends on your tax situation and investment goals.
Read more about how ETFs fit into a broader commodity investment strategy on the inflation hedge and diversification pages.