Unlike a traditional investment fund, an exchange traded fund or commodity (ETF or ETC) trades on a stock exchange. An ETF will typically invest in the underlying assets of an index, like the FTSE 100. An ETC will typically track the price movement in a commodity, like gold.
The pricing of an ETF and ETC can be affected by supply and demand, and is not purely determined by the value of underlying assets. However, its price is controlled through a mechanism known as ‘arbitrage’ which helps to maintain the price close to the net asset value of its holdings, although some deviation can occur.
Additionally, ETFs and ETCs may borrow money to try and boost investment returns, something that is not possible through a traditional investment fund.
Because ETFs and ETCs are traded on a stock exchange, there is an additional charge for investing in them, known as the dealing charge, to cover the cost of stockbroking services.
Exchange traded investments are complex and aren’t suitable for everyone. Please speak to your financial adviser for more information and before making any investment decisions.