An Exchange Traded Fund or ETF is simply a managed fund (mutual fund) that is listed on the stock exchange.

Pulling Apart an ETF

A managed fund (read: 'mutual fund' in the USA) is simply a pooled sum of money that is managed by a professional funds management company. Watch our 'What is a Managed Fund?' video below.

 

An Exchange Traded Fund is simply a managed fund that is traded on the stock exchange.

Are all ETFs index funds?

No. An ETF can use a passive investment strategy (e.g. tracking the ASX 200) or active investment strategy; for example, where a manager picks stocks they think will outperform the market.

Watch our 'What is an Index Fund?' video below.

An ETF might also invest in different asset classes, like bonds, property, cash accounts or commodities, or even internationally. It all depends on the strategy used by the funds management company. You can read more about the ETF's strategy in its Product Disclosure Statement (PDS).

How does an ETF work?

Investors buy and sell into an ETF the same way they would buy a share / stock on the market.

The fund manager accepts the order and uses the investor's money to buy or sell the underlying investments.

For example, if an investor bought into a fund which tracks the ASX 200, the fund manager would issue 'units' to the investor and use their money to buy all 200 shares in the ASX 200. In most ETFs, however, the fund manager will use 'Authorised Participants' to gather the shares for them, for a small fee.

For example, when an investor sells their ETF units, the fund manager's Authorised Participant will sell the equivalent amount of shares on the market.

Like all investments, ETFs have risks. Some of these will be listed in the fund's PDS.

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ETF stands for…

ETF stands for Exchange Traded Fund.