What is an ETF?
An ETF (Exchange Traded Fund) is an investment fund that is bought and sold on the stock market, like a share, and that usually copies an index.
How it works
An ETF that replicates the S&P 500 buys the index's 500 companies in the same proportions. If the index rises 6%, the ETF rises roughly 6%, minus its fees. With a single purchase, your money is spread across hundreds of companies.
How it differs from an index fund
- Where it is bought: an ETF is bought through a broker during stock market hours, at a price that changes through the day. An index fund is bought through a fund manager or bank and priced once a day.
- Tax: in Spain, investment funds let you move money to another fund without paying tax until you sell. With ETFs, every sale is taxed.
- Operation: with an ETF you need a brokerage account.
Advantages
- Usually low fees.
- Instant diversification.
- Easy to buy and sell.
Risks
- They can lose value, just like the market they copy.
- Some ETFs are very complex (leveraged or commodity-based) and not for beginners.
- Because they trade like shares, it is tempting to buy and sell often, which usually gets expensive.
More on the equivalent fund in Index funds for beginners. Taxation depends on each case, so it is worth reading up.
In short
An ETF is a fund that trades on the stock market and copies an index. It is diversified and cheap, but it can lose value and is taxed differently from an index fund.
Informational and educational content. Not financial advice.