Like traditional tracker funds, Exchange Traded Funds (ETFs) aim to mimic the performance of a particular market or index such as the FTSE 100 and like a traditional tracker their value is determined by whether or not the index rises or falls.
But ETFs differ in that they are traded like individual stocks, on an exchange such as the London Stock Exchange and can be bought and sold through brokers in the same way as any other listed stock.
ETFS are passive investments in that they are not actively managed by a fund manager who chooses which assets to buy and sell. An ETF has holdings in every company on the index and only buys and sells holdings to reflect movements in the market.
One of the main attractions of ETFs over traditional trackers or active funds is that they are priced continuously throughout the day, whereas conventional funds are priced just once a day and you do not know what the price will be before you buy or sell.
ETFs are therefore ideal for investors who want to profit from short-term movements. You can buy ETFs that track exotic markets such as Brazil, Eastern Europe, Taiwan, and even Korea – areas that historically have been difficult for small investors to gain access to.
After the launch of the first Exchange Traded Fund (ETF) on the New York Stock Exchange, and the subsequent successful development of the US ETF market, the European ETF market is today one of the fastest-growing segments of the European asset management industry.
There are now more than 27 asset management companies offering around 376 ETFs on 16 stock exchanges. Assets under management in Europe have risen by more than 28% since the end of 2006, standing in excess of $115 billion as at end-August 2007 as increasing numbers of investors, professional and private alike, take advantage of these investment vehicles.