What Are ETFs? What Are Exchange Traded Funds?

This guide is part of our Comprehensive Guide To ETFs. We recommend checking out the guide in full in order to become an ETF expert!

ETF = Exchange Traded Fund

Let’s break down these words ‘Exchange Traded Fund’.

Exchange Traded

Individuals can buy and sell goods in different ways. In the case of shares there are formal ‘exchanges’ set up that allow people to buy and sell shares such as the Australian Securities Exchange (ASX). When people buy or sell shares they are ‘traded’ on the exchange, thus ‘exchange traded’.

Fund

A fund is something that pools together money and invests it into particular assets. Money can come from sources like retail investors (individuals), banks and even other funds. Different funds may have different assets they want to invest in whether they be shares, property, bonds, gold or many others.

Funds can take in money in different ways. A fund may take in money by investors writing to the fund and asking to deposit money into the fund, this is usually the case with ‘Managed Funds’.

An Exchange Traded Fund (ETF) is actually traded on an exchange like the Australian Securities Exchange (ASX). An ETF can take in money by people buying a portion of the fund (a ‘unit’) through the exchange.

Just like when people invest in a company by buying shares in the company on an exchange, people can invest in a fund by buying units in the fund on an exchange.

Listed Security

When a security can be bought and sold on an exchange it is said to be listed on that exchange. Funds that are traded on an exchange are called 'Listed Funds'. An ETF is a type of listed fund.

Listed funds also include:

  • Exchange Traded Commodities (ETCs)
  • Real Estate Investment Trusts (REITs)
  • Listed Investment Companies (LICs)

 

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