What is an ETF?

An exchange traded fund (ETF) is a fund that’s set up to track the underlying market performance of a particular area or sector. 📊 They are sometimes referred to as a ‘basket’ because the ETF itself contains multiple assets – similar to how your shopping basket might contain lots of different products.

 

Why buy ETFs?

People buy ETFs because they’re a cheaper way to invest rather than having to buy each asset they contain individually. For example, to replicate the price movements of the S&P 500 index – which gives broad exposure to the US economy – you’d need to buy hundreds of different US stocks including Apple, Microsoft, Amazon, Tesla and Alphabet, and that would cost thousands of pounds. 

But, by investing in an S&P 500 ETF, you’d get broad, diversified exposure to the same companies for a much cheaper price (around £60 per share for our Vanguard S&P 500 ETF at the time of writing – 1 February 2022). And, you don’t need to worry about diversifying yourself manually, because the ETF does it for you by spreading your money across different companies according to their weighting in the S&P 500 index. 

 

Who creates ETFs?

ETFs are created by a ‘sponsor’, which is usually a financial institution or financial services provider – like Blackrock or Vanguard – that wants to offer an asset that tracks a particular area. The sponsor will file a report with a financial regulator – in the UK, that’s the Financial Conduct Authority (FCA) and in the US, it’s the Securities and Exchange Commission (SEC) – and the regulator will review the report.

If the ETF is approved – based on the proposed management style, perceived risk and potential value to investors, to name a few criteria – the ETF sponsor will begin to create the fund. To do this, they will need to purchase different assets and package them together to give the ETF the best chance of mirroring the sector or area that it has been set up to track. 📦

Once that’s done and the ETF is performing as it should in pre-market tests, the sponsor will decide which exchange the fund will be listed on – and it’ll also need to give it a name and a ticker symbol. 🔣 From this point, the leg work is done and shares in the ETF are ready to be listed to the public.

 

ETFs vs tracker funds

ETFs and tracker funds are two very similar investment options, but there are some key differences that you should be aware of. For example, ETFs can be separated into active and passive, but tracker funds are always classed as passive investments. Here’s a definition of each.

  • Active funds are constantly monitored by an investment provider to attempt to outperform certain market benchmarks. For example, an actively managed S&P 500 ETF will attempt to beat the returns of the S&P 500 index. Active funds often cost more and have additional fund management fees compared to passive funds. 
  • Passive funds on the other hand are not actively managed. They are set up to track the performance of a particular benchmark – they don’t seek to outperform it.

With Moneybox, all of the funds we offer are passive, and our ETFs work similarly to our tracker funds. This means that if you place a buy or sell request, it will be passed on for execution the next working day. We launched ETFs to offer more investment choice to our customers – scroll down to see the ETFs we offer.

 

Best ETFs to invest in

The best ETFs to invest in will depend on your own investment goals, and your attitude to the fund’s anticipated levels of risk and reward. There are ETFs for almost everything that you’d want to invest in, and each is better suited for different purposes – from entire sectors, to national economies and particular themes. 📋

For example, you can invest in ETFs that give you exposure to the cyber security or robotics sectors, the national economies of the US through the S&P 500 or UK through the FTSE 100, and up-and-coming investment opportunities like clean energy, the ageing population and more. 

 

Examples of ETFs

Here are some of the ETFs we offer at Moneybox, along with the fund’s key investor information document (KIID) which contains additional information about the fund.

Name Description Key information
iShares Global Clean Energy ETF Back the companies that are leading the charge in the future transition to clean energy. Fund information – KIID
Legal & General Cyber Security ETF Spread your money across companies like Cisco and Darktrace that are innovating in the cyber security sector. Fund information – KIID
iShares Physical Gold ETC Track the current market price of responsibly sourced physical gold bullion. Fund information – KIID
Vanguard S&P 500 ETF Benefit from the growth of the US economy with a single investment. Fund information – KIID
Vanguard FTSE 100 ETF Get exposure to the 100 largest companies listed in the UK, including AstraZeneca and Unilever. Fund information – KIID

Explore our fund range

 

How to buy ETFs 

With Moneybox, you can buy ETFs directly through our award-winning app. First, you’ll need to download the app, create an account and choose your product. Currently, ETFs are exclusively available to our Stocks & Shares ISA customers. 

Our Stocks & Shares ISA lets you invest up to £20,000 each tax year, and you won’t pay any tax on any of your gains. When you’ve opened an account and you log into the app for the first time, you’ll get the option to choose one our our three simple Starting Options. Once you’ve done that, select the pencil icon to customise your allocations to bring ETFs into your portfolio.

If you’ve already got an ISA with us, you can customise your allocations at any time in-app. Just go to Settings > Allocations > Change allocation. You can also buy or sell additional funds whenever it suits you.