Funds & wrappers
ETF
Also called Exchange-traded fund
A fund whose shares trade on an exchange throughout the day like an ordinary share.
How it works
ETFs combine a fund’s diversification with intraday dealing. Most track an index, though actively managed ones exist.
A creation and redemption mechanism run by large institutions keeps the market price close to the underlying value, which is what stops ETFs drifting to large premiums or discounts.
Where it misleads people
The arbitrage mechanism works well in liquid markets and less well in stressed ones. ETFs holding hard-to-trade assets have traded at meaningful discounts during turmoil, because the underlying could not be priced or sold.
Related terms
- Index fundA fund that aims to match an index rather than beat it, at very low cost.
- Net asset valueThe value of everything a fund owns, minus what it owes, divided by the number of units.
- Premium and discountThe gap between a listed fund’s share price and the value of the assets it holds.
- Tracking errorHow much a portfolio’s returns deviate from its benchmark, measured as the volatility of the difference.
- Synthetic ETFAn ETF that uses a swap to deliver an index return rather than holding the constituents.
Mentioned in
More in Funds & wrappers
- Expense ratio
- Distribution
- Factor investing
- Cash drag
- Active share
- Active management
- Gating
- Transaction costs
All 25 Funds & wrappers terms · The full glossary, 433 terms
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