Exchange traded funds (ETFs)

Exchange traded funds, or ETFs, are funds that are traded on a stock exchange and whose assets mirror the price movements of an underlying index. ETFs are available to track most indices, whether they are stock market-based or otherwise. For instance it is possible to purchase an ETF that will follow commodities (strictly called an ETC).

There are two different styles of ETF. The first is underpinned by the provider holding the physical assets, which means there is little counterparty risk. The second type relies on a counterparty underwriting the risk, and in this case there is some risk from counterparty failure, for example, Lehman Brothers in 2008.

One methodology is not necessarily better than the other but it is an issue that potential investors should be aware of. For this reason potential investors should seek the advice of an independent financial adviser or wealth manager before investing.