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What is an ETF? A plain-English guide for UK investors

One purchase, many companies. How ETFs work, what they cost, what can go wrong and how to buy one.

The short version

  • An ETF (exchange-traded fund) is a fund that holds lots of investments at once and is bought and sold on a stock exchange, like a share.
  • Most ETFs track an index, such as the FTSE 100, so you get a small slice of every company in it.
  • They're usually cheap to own, and you can hold them in a stocks and shares ISA or a SIPP.
  • Their value can fall as well as rise. An ETF spreads your risk. It doesn't remove it.

This is the starting guide in ETF basics. Every guide in the series is listed at the end of this page.

  • 100companies you own a slice of with one FTSE 100 ETF
  • 0%stamp duty on buying an ETF, against 0.5% on UK shares
  • £85,000FSCS cover if your platform fails and investments are missing

An ETF in one example

Say you want to own a piece of the 100 biggest companies on the London Stock Exchange. Doing it yourself would mean 100 separate purchases, 100 sets of dealing fees and a lot of money.

A FTSE 100 ETF does it for you. It holds all 100 companies, in the same proportions as the index. Buy one unit of the ETF and you own a tiny slice of each.

When the FTSE 100 rises, your ETF rises with it, minus small costs. When the index falls, so does your ETF.

That’s the whole idea: one purchase, many companies.

If a word here is new, the ETF glossary explains it in plain English.

How an ETF works

You invest through your platform, which buys ETF units on the stock exchange. The ETF owns every company in its index. An index provider decides what's in it, and a custodian holds the assets separately from the provider.YouChoose an ETFand investYour platformISA, SIPP orgeneral accountStock exchangeETF units tradethrough the dayThe ETFOne fund thatowns them allEvery companyin the indexIndex providerDecides which companiesand how much of eachCustodianHolds the fund’s assets,ring-fenced from the providerYou invest through your platform, which buys ETF units on the stock exchange. The ETF owns every company in its index. An index provider decides what's in it, and a custodian holds the assets separately from the provider.YouChoose an ETF, investYour platformISA, SIPP or accountStock exchangeUnits trade all dayThe ETFOne fund, owns them allEvery company in the indexIndex providerDecides what’sin the indexCustodianHolds assets,ring-fenced
How your money reaches every company in the index.
  1. An index sets the recipe. An index provider, such as FTSE Russell or MSCI, decides which companies are in the index and in what proportions.
  2. A fund provider builds the fund. Firms such as iShares, Vanguard, Invesco and HSBC create ETFs that hold the investments in an index.
  3. A custodian holds the assets. The fund’s investments are kept by an independent custodian, separate from the provider’s own money.
  4. The ETF is listed on a stock exchange. Its units trade during the day, like shares, at a price close to the value of what it holds.
  5. You buy units through a platform. An investment platform or broker buys them for you and holds them in your account, often inside an ISA.

What an ETF costs

ETFs are popular partly because they’re cheap. There are three costs to know about.

  • The ongoing charge: a yearly fee taken from the fund. For large global and UK index ETFs it’s typically between 0.07% and 0.20% a year (what does an ETF really cost? has examples).
  • The spread: the small gap between the price you buy at and the price you could sell at.
  • Your platform’s fees: what it charges to hold your account and to buy or sell.

There’s one cost you don’t pay: stamp duty. Buying UK company shares usually costs 0.5% in tax, but UK law exempts ETFs.

Small differences in fees add up over decades. The fee calculator shows by how much.

ETFs compared with other ways to invest

ETFIndex fundInvestment trustIndividual shares
How you buyOn a stock exchange, through a platformFrom the fund, through a platformOn a stock exchange, through a platformOn a stock exchange, through a platform
PriceChanges through the daySet once a dayChanges through the day, and can sit above or below the value of its assetsChanges through the day
Spread across many companiesYesYesYesNo, unless you buy many
Stamp duty when you buyNoNoYes, 0.5%Yes, 0.5% on UK shares

ETFs and index funds often hold exactly the same things. The main difference is how you buy them. ETF vs index fund vs investment trust compares them in detail.

The main types of ETF

  • Share ETFs hold company shares, from a single country’s biggest firms to the whole world.
  • Bond ETFs hold government or company bonds, which usually move less than shares. See bond ETFs for beginners.
  • Sector and theme ETFs focus on one industry, such as technology or healthcare. Narrower means riskier.
  • Commodity products track gold, oil and the like. In the UK these are usually ETCs (exchange-traded commodities), which have a different legal structure from ETFs.
  • Leveraged and inverse products are designed to multiply or reverse an index’s daily moves. They’re built for short-term trading and can lose money fast. They’re not a place to start.

What can go wrong

  • Markets fall. An ETF tracking shares falls when shares fall, sometimes sharply. What happens in a crash shows every big UK fall since 1871.
  • Currencies move. A global ETF priced in pounds still holds mostly foreign companies. If the pound strengthens, those holdings are worth less in pounds, and the reverse.
  • It won’t match the index exactly. Costs and the way the fund tracks usually leave returns slightly behind the index. The gap is called tracking difference.
  • The provider runs into trouble. A UCITS ETF’s assets are ring-fenced from the provider’s own money, so they can’t be used to pay its debts. If your platform fails and your investments are missing, the FSCS can pay up to £85,000. Are ETFs safe? explains the protections.

Why many people start with ETFs

  • Instant spread: one purchase can cover hundreds or thousands of companies.
  • Low cost: index ETFs are among the cheapest ways to invest.
  • No stamp duty when you buy.
  • Transparency: you can see exactly what the fund holds on the provider’s website.
  • Tax-free homes: you can hold them in a stocks and shares ISA or a SIPP.
  • Easy to trade: you can buy or sell whenever the stock market is open.

None of this means ETFs suit everyone, or that any particular ETF is a good buy. It means they’re a simple, low-cost way in.

Whether paying a fund manager to pick shares does better is covered in active vs passive funds: what the evidence shows.

How to buy one

You need an account with an investment platform, often a stocks and shares ISA so you pay no tax on the gains. If you’re deciding between a cash ISA and a stocks and shares ISA, the 2027 cash ISA guide explains the difference. Then search for the ETF by name or ticker, enter how much you want to invest, and buy. How to buy your first ETF walks through every step.

Common questions

Do ETFs pay dividends?
Many do, passed on from the companies they hold. Distributing ETFs pay them out to you. Accumulating ETFs reinvest them for you automatically. More on accumulating vs distributing.
Can I lose money in an ETF?
Yes. An ETF is only as good as what it holds. If those investments fall, so does the ETF.
What’s the difference between an ETF and an index fund?
They often hold the same things. ETFs trade on an exchange through the day. Index funds are bought from the fund at one price a day.
How much do I need to start?
Often less than you’d think. Some platforms let you buy part of an ETF unit or invest a small amount each month. See how much do I need to start?
Is an ETF the same as a share?
No. A share is a piece of one company. An ETF unit is a piece of a fund that owns many.

Every guide in ETF basics

This page explains how ETFs work. It isn't advice about what you should buy. Investments can fall as well as rise, and you may get back less than you put in. Read the full disclaimer.

Sources

  1. The Stamp Duty and Stamp Duty Reserve Tax (Exchange Traded Funds) (Exemption) Regulations 2014, legislation.gov.uk
  2. Tax when you buy shares, GOV.UK
  3. Legal structure of ETFs: UCITS, justETF
  4. Investments, Financial Services Compensation Scheme

Facts checked 13 October 2026.

Read next

  • ETF basics

How ETFs work behind the scenes: why the price stays close to the value

You buy an ETF in seconds on a stock exchange. Behind that sits a system of big trading firms that create and cancel units, quote prices all day and keep the price honest. Here's how it works, and when it strains.
  • Last reviewed 14 October 2026
  • ETF basics

What does an ETF really cost? The fees you see and the ones you don’t

A big index ETF usually charges a fraction of 1% a year. That's only one of the costs. Here's the full list, with real charges as examples.
  • Last reviewed 14 October 2026
  • Getting started

How to buy your first ETF: step by step

From opening an account to the confirmation that lands afterwards. What each step involves, which order to use, and the cost you won't see on the bill.
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