ETFs Explained: What They Are and Why Investors Use Them

What is an ETF?

An ETF (exchange-traded fund) is a single investment that holds a range of assets, such as shares, bonds or commodities. By buying one ETF, investors can gain exposure to many investments at once.

Like shares, ETFs are traded on stock exchanges during market hours. This makes them a simple and accessible way for investors to invest in diversified portfolios.

How do ETFs work?

Most ETFs are designed to track an index. An index represents a specific market or group of investments.

Common examples include:

• S&P 500 – tracks 500 of the largest companies in the US
• MSCI World – tracks companies across developed markets worldwide
• FTSE 100 – tracks 100 of the largest companies on the London Stock Exchange

You cannot invest directly in an index. Instead, ETF providers, such as iShares, create and manage ETFs designed to replicate the performance of an index as closely as possible. This gives you a practical way to invest in that market.

In short: the index sets the direction, and the ETF follows it to replicate the performance of the market.

Why are ETFs popular with investors?

Millions of investors use ETFs to access financial markets.¹

Here are six key reasons:

1. Diversification

With a single ETF, you can invest in many different assets. This spreads your investment across multiple companies, sectors or regions.

Diversification does not fully protect against market risks.

2. Easy access

ETFs make it simple to invest in:

• Entire markets
• Specific regions
• Industries or sectors
• Different asset classes

Even markets or products, such as bonds, that were previously difficult for individuals to access, are now available through ETFs.

3. Lower costs

ETFs typically have lower ongoing costs compared to many other investment products. Lower costs can help investors retain more of their returns over time.

Capital at risk: The value of investments and the income from them can fall as well as rise and are not guaranteed.

4. Liquidity

ETFs are traded on stock exchanges throughout the day. This means they can be bought or sold during trading hours.

5. Transparency

ETFs regularly disclose their holdings, allowing investors to see which assets are included and how the ETF is structured—providing clear visibility into their investments.

6. Simplicity

ETFs combine diversification, accessibility and transparency in a single product. This makes them easy to understand and use, especially for beginners.

The different types of ETFs

The ETF market is broad and offers many options, including:

• Broad market ETFs (e.g. global indices like MSCI World)
• Regional ETFs (focused on specific countries or regions)
• Sector ETFs (e.g. technology, healthcare)
• Thematic ETFs (focused on long-term trends such as AI or clean energy)

This flexibility allows investors to build portfolios that match their goals and time horizon.

In short: ETFs offer solutions for different investment strategies.