ETFs — Exchange-Traded Funds — have become one of the most popular investment vehicles in the world, and for good reason. They combine the diversification of a fund with the simplicity and low cost of trading a single share.

📋 Key points
  • What is an ETF?
  • ETFs versus index funds — what is the difference?
  • The costs of ETFs
  • Popular ETFs for UK investors
  • Tax-efficient investing with ETFs

What is an ETF?

An ETF is a fund that tracks an index, sector, commodity, or collection of assets and trades on a stock exchange just like an individual company share. When you buy an ETF you get exposure to everything inside the fund in a single transaction.

For example, buying a FTSE 100 ETF gives you exposure to all 100 of the UK's largest companies in one simple purchase, rather than having to buy shares in each company individually.

ETFs versus index funds — what is the difference?

ETFs and index funds are very similar — both typically track an index and both charge low fees. The main practical difference is that ETFs trade throughout the day on a stock exchange, so their price fluctuates continuously, while traditional index funds are priced once per day after the market closes.

For long-term investors this distinction rarely matters in practice. Both are excellent options.

The costs of ETFs

ETFs charge an annual management fee called the Total Expense Ratio or TER. For broad market ETFs this is typically between 0.05% and 0.25% per year — extremely low compared to actively managed funds.

You will also pay dealing charges when you buy and sell ETFs on most platforms, though some platforms offer commission-free ETF trading.

Popular ETFs for UK investors

Some of the most widely held ETFs among UK investors include the iShares Core MSCI World ETF, the Vanguard FTSE All-World ETF, and the iShares Core S&P 500 ETF. All three provide broad global diversification at very low cost.

Tax-efficient investing with ETFs

ETFs held inside a Stocks and Shares ISA are sheltered from income tax and capital gains tax, making them extremely tax-efficient for UK investors. You can invest up to £20,000 per tax year in an ISA.

Bottom line

ETFs are an excellent building block for a long-term investment portfolio. Low costs, broad diversification, and simplicity make them ideal for investors of all experience levels. Start with a broad global ETF inside a Stocks and Shares ISA for the simplest and most tax-efficient approach.