All definitions

ETF

An Exchange Traded Fund (ETF) is a collection of assets which is traded on the stock market, just like a normal stock.

The price of the ETF should reflect the underlying value of its assets. Sometimes a dislocation can occur, where the price of the ETF is less than its underlying assets, but this is unusual for frequently traded ETFs, as traders will quickly take advantage of any price discrepancy.

There are many different ETFs. Some will track industries (such as cloud computing), others track assets (such as oil), and some will track entire markets.

Some of the largest ETFs in the world track indexes such as the S&P 500, and the FTSE 100. By purchasing an ETF, your returns should match the market as a whole, minus any costs incurred by the ETF itself, and your investment costs. You will also receive dividends, just like you owned the stocks directly.

The best type of ETF owns the actual assets it is tracking. Contrast this to a synthetic ETF, which may track the market through some indirect means, or by only owning a subset of the market.

One advantage of index tracker ETFs in the UK, is you aren't charged stamp duty when purchasing them. By buying individual stocks you have to pay a small tax to the Government, which is usually collected at the time of purchase by your investment platform.