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ETFs - an introduction What is an Exchange Traded Fund and how do they work

Exchange traded funds (ETFs) are among the most popular investment instruments. They combine the benefits of stocks and funds while offering investors the opportunity to invest inexpensively, flexibly and transparently in entire markets, thereby diversifying their portfolio with just a single transaction.

What is an exchange traded fund (ETF)?

An exchange traded fund (ETF) is an investment fund that tracks the performance of its underlying index and can be bought and sold on the stock exchange. Like a traditional fund, an ETF is a mutual fund and thus unaffected by any insolvency of the ETF provider. It allows the benefits of a collective investment fund yet trades like a share.

ETF trading can be done on the stock exchange or over the counter at any time of the day. As ETFs are pegged to an underlying index, they are passive investment vehicles that merely replicate the performance of their underlying asset. In other words, when the underlying index increases in value, the value of the ETF increases likewise.

The first ETFs were listed in the US in 1993 and Europe from 1999. Since then, a steadily increasing number of them have become available. Traditionally ETFs are passive index funds but actively managed ETFs have also come into play since their authorisation in 2008 and require a portfolio management strategy.

Exchange traded funds are available in a wide range of underlying asset classes (e.g. stocks, bonds, commodities, real estate). Whether purchasing a single ETF that exposes the investor to a specific market, or a selection of ETFs over multiple markets, exchange traded funds are an excellent way to create a balanced investment portfolio. Both new and experienced investors should look to them for competitive, cost-effective and long-term results.

What are the key characteristics of ETF Trading?

Diversification

ETFs provide you with the opportunity to diversify your portfolio in a very inexpensive and efficient manner by distributing risk across multiple risk carriers, allowing you to optimize the risk profile of your investment. Because ETFs track an index, you can cover an entire market with just a single transaction.

Security

Like traditional funds, ETFs are mutual funds. They are unaffected by any insolvency of the ETF provider or custodian bank as the fund's assets are not included in the bankruptcy estate.

Cost efficiency

ETFs do not incur any issue or redemption surcharges – just the transaction costs of buying and selling an ETF. Moreover, only a minimal management fee is charged..

Transparency

ETFs are particularly transparent investment instruments because they match the performance of the underlying index, net of fees. All key trading and other information can be viewed on an intraday basis or in real time. UBS ETFs calculate the indicative net asset value every 15 seconds during normal trading hours.

Flexibility

ETFs are easy to buy and sell – including on an intraday basis. Investors are able to act on market views within seconds. Due to these characteristics, ETFs can be used as part of an investment strategy in a variety of ways: for long-term growth, for short-term trading opportunities and for hedging part of a portfolio.

Find further information on our Frequently-Asked-Questions page