What is an exchange-traded fund (ETF)?

An exchange-traded fund (or ETF for short) is an investment fund that can be bought and sold on the share market (like a share). Each ETF holds a pool of underlying assets – such as shares, bonds or commodities – and will typically aim to track a particular market index (e.g. an Australian equities ETF may seek to track the ASX200 index). However, rather than selecting individual investments or specific managed funds, ETFs usually invest broadly within and across their entire index of interest. That is, they literally buy the whole index (or a very close subset) that they seek to track, allocating their funds across every (or almost every) share/bond/asset in the same proportion that those shares/bonds/assets represent the underlying market. In doing so, ETFs basically mimic the performance of their targeted index – but with low costs and high tax efficiency.

Being readily tradeable on the share market, ETFs represent an excellent vehicle to provide investors with a low-cost, highly diversified and immediate exposure to specific target asset classes.