ETF Education

Why investors use ETFs

ETFs can provide exposure to a range of shares, bonds, or other assets through a single fund.
Many ETFs are designed to track an index, giving you a straightforward way to gain exposure to a particular market, sector, theme, or asset class.
ETFs are traded on stock exchanges during market hours. Information about their holdings and objectives is typically published regularly, helping you monitor your investments and understand how a fund is invested.

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Marketing Communication. The value of your investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Exchange traded funds (ETFs) are often described as baskets of investments that can be bought and sold in a single trade on a stock exchange. Imagine buying a fruit basket instead of selecting each apple, orange, and pear individually. Rather than choosing every item one by one, you're purchasing a collection assembled around a particular theme.

ETFs work in much the same way. Instead of buying individual shares or bonds, you buy a single fund that holds many investments. Some ETFs are designed to track broad market indices, while others focus on specific sectors, regions, asset classes, or investment strategies.

ETF features and characteristics

Investing in ETFs differs from investing in company shares in important ways. It's worth considering the following key qualities of ETFs before investing.

1. Portfolio diversification

Why it matters: Diversification may reduce the risks associated with individual investments, though it does not prevent losses.

ETFs may invest in a variety of shares, bonds, or other assets. They may also invest in a combination of asset types. Some ETFs track the performance of broad benchmark indices that include many individual investments, such as the MSCI All Country World Index or the EURO STOXX 50 Index. Other ETFs focus on specific sectors, like Information Technology or Health Care, or invest in specific regions around the world.

By providing exposure to many investments in one fund, ETFs may help spread a portfolio across individual investments, asset classes, and markets. This approach, called diversification, can reduce the risk that problems with one or a small number of investments will have an outsized impact on the portfolio's returns. Diversification does not guarantee gains or ensure against losses, however.

2. A wide variety of investment choices

Why it matters: A wide choice of ETFs may let you gain exposure to many different types of investment.

There are more than 14,000 ETFs worldwide.¹ They can provide access to both broad and targeted exposures, though not all are suitable for all investors or available in every market. These exposures include:
• Asset classes: Equities, fixed income, commodities, currencies, alternatives, multi-asset
• Geographies: Global, regional, developed markets, emerging markets, single country
• Sectors and industries: Biotech, insurance, transportation
• Investing styles: Dividend, growth, value
• Fixed income: Government bonds, corporate bonds, high yield
• Long-term investment themes: Sustainability, technological advances

3. Costs

Why it matters: Costs affect investment returns, so it's worth comparing ongoing charges, transaction costs, and platform fees.

Index-tracking ETFs often have lower ongoing charges than many traditional investment funds managed by a fund manager who chooses the investments. However, costs vary, and it's worth also considering trading costs and platform fees.

4. Trading flexibility

Why it matters: Because ETFs trade on an exchange throughout the trading day, you can generally buy and sell shares whenever the market is open.

ETFs can generally be bought and sold during exchange hours. Liquidity and trading costs can vary by ETF and market conditions, and an ETF's price can move above or below the value of its underlying investments.

5. Holdings disclosure

Why it matters: Transparency can help you better understand what the fund owns.

Many ETFs disclose their holdings regularly, often daily, which can help you understand what the fund owns.

Frequently asked questions

How do ETFs differ from individual shares?

How do ETFs differ from traditional investment funds?

What types of ETFs are available?

Are there risks associated with ETFs?

Before buying an ETF, you can review the fund's objectives, risks, charges, and key documents, including the Key Information Document (KID), and, where available, the prospectus.

Tax treatment varies from investor to investor, depending on things like where you live, where the ETF is based, how you hold it, and whether it pays out income or reinvests it. It's worth understanding how a particular ETF would be taxed in your situation before you invest.

Glossary

Asset class
A broad type of investment with similar characteristics, such as company shares (equities), bonds (fixed income), or commodities. Different asset classes can behave differently under the same market conditions.

Benchmark
A market index that an ETF aims to track or measure itself against. For example, an index of large European companies or of global shares.

Bond
A type of investment that represents a loan to a government or company. In return, the issuer typically pays interest and aims to repay the original amount at maturity.

Diversification
Spreading investments across many holdings, sectors, or asset classes to reduce reliance on any single one. Diversification does not remove risk or prevent losses.

ETF (exchange traded fund)
An investment fund that holds a basket of investments, such as shares or bonds, and trades on a stock exchange like a share. Many ETFs track an index; others are actively managed.

Factor
A characteristic used to select investments, such as value, quality, momentum, or low volatility. Some ETFs are designed to provide exposure to one or more investment factors.

Index
A group of investments used to measure the performance of part of a market. For example, an index might track large European companies or global shares.

Key Information Document (KID)
A short, standardised document giving retail investors the essential facts about an investment, including its risks and costs.

Liquidity
How easily an investment can be bought or sold without significantly affecting its price. Liquidity can vary with the ETF, its underlying holdings, and market conditions.

Ongoing charges
The yearly cost of running an ETF, shown as a percentage of the fund's value. This typically does not include trading costs or platform fees.

Prospectus
A detailed document that sets out an investment fund's objectives, risks, charges, and how it works.

Sector
A group of companies that operate in the same part of the economy, such as health care, financials, or technology. Some ETFs focus on a single sector.

Share
A unit of ownership in a company. When you buy an ETF, you buy shares in the fund, which in turn holds investments such as company shares or bonds.

Sovereign bond
A bond issued by a national government to raise money. Sovereign bond ETFs invest in portfolios of government bonds.

Traditional investment fund
An investment fund that pools money from many investors to buy a portfolio of investments. Unlike an ETF, it is usually bought or sold at a single price calculated once a day, rather than traded on an exchange.

Footnotes

Disclosure

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State Street Global Advisors (SSGA) is now State Street Investment Management. Please click here for more information.

Marketing Communication

Important Information

Investing involves risk including the risk of loss of principal.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street Investment Management’s express written consent.

All information is from State Street Investment Management unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Equity securities may fluctuate in value and can decline significantly in response to the activities of individual companies and general market and economic conditions.

Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates rise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

Currency Risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

Diversification does not ensure a profit or guarantee against loss.

Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs.

There can be no assurance that a liquid market will be maintained for ETF shares.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.

Why investors use ETFs

ETF features and characteristics

Frequently asked questions

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