As with mutual funds, an ETF allows investors to buy and sell a basket of assets without having to buy all the components individually, but unlike a mutual fund, an ETF can be bought and sold throughout the trading day.
When explaining what an EFT is, Laith Khalaf, financial analyst at AJ Bell described it as very similar to a tracker fund. Khalaf explained: “Plain vanilla ETFs are very similar to tracker funds, in that they follow the performance of a broad market index, and do so at extremely low cost. They can also be held in ISAs and SIPPs just like traditional funds, and so have their gains and income sheltered from tax. Probably the most attractive edge that ETFs offer is they can be traded throughout the day, giving investors greater scope to buy on dips. By contrast, tracker funds work on a forward pricing basis, so you never know exactly what price you will pay. Over the long term, this isn’t likely to make a big difference, but some investors like to invest part of their portfolio more tactically, and some simply want to know they can buy and sell immediately, as they can with listed shares.
“ETFs can also be useful to give investors more specialised exposure to particular themes in the market, which active and index funds don’t tend to cover in such a focused way. For instance, the iShares Automation and Robotics ETF tracks an index of companies involved in the robotics and automation industry.”
