What are ETFs?
An ETF (exchange-traded fund) is a single investment that holds a basket of assets, often hundreds of stocks or bonds, and trades on an exchange like a share. One purchase gives an investor diversified exposure to the whole basket. This guide explains what an ETF is and how it works, the main types of ETFs, the advantages and risks, and the routes into ETF investment, including on Mintos.
Questions to ask before investing in ETFs
→ What does it really cost to hold one, once the ETF’s expense ratio is factored in?
→ How does an ETF differ from an index fund or a mutual fund?
→ Which route fits better, hand-picking individual ETFs or a managed Core ETF portfolio?
→ What are the practical steps to invest in ETFs once that choice is made?
Disclaimer
This is a marketing communication and in no way should be viewed as investment research, investment advice, or recommendation to invest. The value of your investment can go up as well as down. Past performance of financial instruments does not guarantee future returns. Investing in financial instruments involves risk; before investing, consider your knowledge, experience, financial situation, and investment objectives.
In this guide to understanding ETFs
- ETFs explained in plain language for European investors
- How ETFs work, from basket to exchange
- ETF vs stock vs fund and the key differences
- The main types of ETFs and what sets them apart
- Advantages and risks of ETF investment
- Routes into investing in ETFs
How do ETFs work?
An ETF (exchange-traded fund) is a single investment that holds a basket of assets, often hundreds of stocks or bonds, and trades on an exchange like a share. It gives an investor diversified exposure to the whole basket in one transaction, and an ETF investment can sit at the core of a long-term portfolio or alongside other asset classes.
Take an investor who wants exposure to technology companies such as Apple or Microsoft. Instead of buying each company’s stock separately, that investor can hold a single technology ETF that already contains those names and many more tech stocks. One holding does the work of many, which is the idea at the center of what an ETF is and why the format has become one of the most widely used ways for European investors to build a diversified position. |
The mechanics behind an ETF
To understand how ETFs work, start with what happens to the money. An ETF pools investors’ funds to buy the underlying basket of assets. Its shares then trade throughout the day at a market price that tracks the net asset value of that basket, which is the combined worth of everything the fund holds. When the value of the underlying holdings moves, the ETF’s price moves with it.
This is where an ETF stock listing behaves differently from the shares inside it. The ETF itself is bought and sold on an exchange like an ordinary share, with a live price during market hours, yet each unit represents a slice of the entire basket rather than a stake in one company. Most ETFs aim to replicate an index rather than outperform it, which keeps management involvement, and therefore cost, low.
Every ETF carries a total expense ratio (TER), an annual fee charged by the provider (such as Vanguard or BlackRock) to cover management and operational costs. This fee is taken out of the ETF’s total assets, impacting the total returns you receive from your investment. The TER is a fundamental aspect of ETF investment and is consistently applied across all trading platforms and markets. |
Additionally, many ETFs offer the advantage of accumulating, with automatic dividend reinvestment. This can help investors compound returns over time without incurring extra transaction fees, though the value of reinvested amounts can still fall.
ETF vs stock vs fund
A single stock is a share in one company, so its fortunes rise and fall with that one business. An ETF holds many securities at once, so a single ETF share spreads risk over the whole basket. That is the core distinction behind the common question of what an ETF stock actually is: the listing trades like a stock, but the exposure behaves like a fund.
- ETF vs single stock
A stock is a share in one company, so its fortunes depend entirely on that one business. An ETF holds many securities at once, so a single ETF can spread risk over the whole basket.
- ETF vs index fund
Both usually track an index. The difference is how they trade: an ETF trades on an exchange throughout the day at a live price, while an index fund is priced once daily after markets close.
- ETF vs mutual fund
ETF is usually passive and lower cost. A mutual fund is more often actively managed with higher fees. Passive management means lower TERs, and that gap in cost compounds over years of holding.
Same index, different wrapper
An ETF and an index fund can track the exact same benchmark, yet the way each one trades, prices, and charges fees creates real differences for an investor’s returns and flexibility. The dedicated comparisons cover this in full:
Types of ETFs
The presence of diverse ETFs stems from the unique needs and objectives of investors. With varying financial goals, risk tolerances, and investment horizons, ETFs are designed to cater to these individual preferences, providing a versatile tool set for building well-rounded portfolios.
Name of ETF | Characteristics |
Equity ETFs | Equity ETFs allocate their assets to stocks, making them suited to investors who want exposure to broad market indices, particular sectors, industries, or countries. These funds provide the opportunity for growth of capital and may also distribute dividends, depending on the underlying assets within the ETF. Equity ETFs are the most widely held category and often form the foundation of a long-term ETF investment. Equity ETFs carry the market risk of the stocks they hold, and their value can fall as well as rise. |
Fixed-income ETFs (also known as bond ETFs) | Fixed-income ETFs focus on bonds and may provide regular interest income. They are generally lower-risk relative to equity ETFs, though their value can fall when interest rates rise, and capital remains at risk. These funds provide an avenue for diversification within the realm of fixed income assets, encompassing various types of bonds such as government bonds, corporate bonds, and municipal bonds. |
Commodity ETFs | Commodity ETFs track the performance of physical commodities such as gold, oil, or agricultural products. They offer exposure to tangible assets. Commodity prices can be volatile, and these ETFs can lose value quickly. |
Sector and thematic ETFs | Sector and thematic ETFs focus on a single industry or theme, such as technology or clean energy. Sustainable ETFs are a subset here, selecting companies on environmental, social, and governance criteria rather than sector alone. These ETFs allow investors to align their holdings with specific views on where markets or industries are headed, or with personal values around sustainability and ethical governance. Concentration in one sector or theme increases risk relative to broad-market ETFs. |
Active vs passive ETFs
Most ETFs are passive, meaning they track an index rather than try to beat it. An active ETF has a manager making selection decisions with the aim of outperforming the market, and that usually comes with a higher expense ratio. The majority of the market is passive, which is one reason ETFs are known for keeping costs low relative to traditional actively managed funds.
The distinction matters because it affects both cost and expected behavior. A passive ETF will mirror the index it tracks, for better or worse. An active ETF introduces the possibility of outperformance, but also the possibility that the manager’s decisions underperform the index after fees. For most European investors building long-term positions, passive ETFs remain the more common starting point.
From categories to a plan
This dedicated guide walks through how to combine equity, bond, commodity, and thematic ETFs into a potential single long-term ETF investment plan.
Advantages and risks of ETFs
ETFs offer a range of advantages and risks that can significantly impact an investor’s portfolio. In this discussion, we will explore the key benefits and drawbacks of ETFs, shedding light on why they have gained such prominence in the world of finance.
Advantages
ETFs hold a diversified basket of assets such as stocks, bonds, or commodities. This diversification can spread risk and gives investors access to entire markets, sectors, or regions through a single holding. Diversification does not guarantee against loss.
An investor can tailor an ETF investment to a specific geography, a broad global index, or a narrow theme, all without needing to pick individual securities.
- Low TERs
ETFs often have lower TERs compared to actively managed funds, making them cost-effective investment options.
Suppose an investor puts €10,000 in an ETF with a 0.1% TER and another €10,000 in a mutual fund with a 1% TER. Over the course of a year, the ETF would cost €10 in fees, whereas the mutual fund would cost €100. That €90 annual difference compounds over time and can make a material difference to long-term returns. |
- Liquidity
ETF shares can be bought and sold on stock exchanges at market prices throughout the trading day. This gives investors flexibility to enter or exit positions during market hours, unlike traditional funds that price once daily.
- Transparency
ETFs disclose their holdings regularly, allowing investors to see exactly what assets sit inside the fund. This transparency makes it possible to verify that an ETF holds what it claims to hold before committing capital.
Risks
- Market risk
The value of an ETF rises and falls with its underlying basket. If the index or sector an ETF tracks declines, the ETF’s value declines with it. Capital invested in ETFs is at risk, and an investor can receive back less than the amount originally invested.
- Tracking error
Some ETFs may not perfectly track their underlying index due to factors like management fees and trading costs, potentially leading to a tracking error.
An ETF is designed to follow a specific index, like the S&P 500. However, due to factors such as management fees and trading costs, the ETF’s performance may not perfectly match the index’s performance. For instance, if the index goes up by 10%, the ETF might go up by 9.8%. This slight difference is the tracking error. |
- Currency risk
An ETF that holds assets denominated in a currency other than the euro exposes an investor to exchange rate movements. Even if the underlying holdings perform well, unfavorable currency shifts can reduce returns when measured in euros.
- Brokerage commissions and bid-ask spreads
While ETFs have low expense ratios, the costs of buying and selling can add up. Brokerage commissions vary by platform, and less liquid ETFs may have wider bid-ask spreads, meaning there is a larger gap between the buying and selling price at any given moment.
How to start investing in ETFs
ETFs are purchased through a broker or investment platform, which acts as the intermediary between the investor and the exchange. The route an investor takes depends on how much involvement they want in selecting and managing their holdings. Investors could consider the following:
- Investment objectives
Long-term growth, regular income, and broad market exposure all call for different types of ETFs, and defining the goal first narrows the selection.
- Portfolio diversification
Selecting ETFs that complement each other and spread risk across regions, sectors, and asset classes can reduce the impact of any single holding underperforming.
- Market research
Monitoring market developments that could affect an ETF investment, from index changes to shifts in interest rates, helps inform timing and allocation decisions.
- Regular portfolio review
Periodically reviewing performance and rebalancing where needed keeps an ETF portfolio aligned with its original goals.
- Broker selection
Fees, the range of available ETFs, and the quality of tools and reporting all vary between platforms and are worth comparing before committing.
Getting started with ETFs on Mintos
The infrastructure around ETF investing has changed over the past decade. Investment platforms now offer the kind of provider range, transparency, and low entry points that were once reserved for larger investors.
Mintos is an investment platform, licenced by Latvijas Banka, that lets you invest in ETFs popular with European investors³, your way. Commission-free ETF investing means €0 Mintos fees to buy, hold, or sell, whether investing in individual ETFs or through the Core ETFs portfolio.²
Individual ETFs
Take full control and select your own ETFs from €1. With over 1,000 ETFs from recognized providers such as iShares, Vanguard, Amundi, and Xtrackers, you can build the ETF portfolio that fits your goals.¹
✔️Popular ETFs from recognized providers¹
✔️Automated regular investing with Investment plan (coming soon)
✔️Commission-free: €0 to buy or sell²
Core ETFs portfolio
An automated ETF portfolio matched to your risk level, from €50. The Core ETFs portfolio builds a globally diversified mix of stock and bond ETFs, automatically rebalanced and reinvested so you do not need to manage it yourself.
✔️Globally diversified portfolio of ETFs, equities, and bonds
✔️Automatically rebalanced and reinvested
✔️Commission-free: €0 to buy or sell²
As with any investment, the value of ETFs can go down as well as up, and you may receive back less than you invested.
¹ ETF providers shown for illustrative purposes only. This does not constitute a recommendation or investment advice.
² Each ETF carries its own annual fee (Total Expense Ratio) charged by the ETF provider, built into the ETF price.
³ Based on frequently searched ETFs among European investors on justETF.com.
Developed by the Mintos Content Team, making investment knowledge accessible for everyday investors across Europe.
Frequently asked questions
What is an ETF?
An ETF (exchange-traded fund) is a single investment holding a basket of assets, often hundreds of stocks or bonds, that trades on an exchange like a share. One purchase gives diversified exposure to the whole basket.
How does an ETF work?
An ETF pools money to buy an underlying basket, then issues shares that trade intraday at a price tracking the basket’s net asset value. Most ETFs track an index rather than trying to beat it.
What is the difference between an ETF and a stock?
A stock is a share in one company. An ETF holds many securities at once, so a single ETF share spreads risk over the whole basket.
What is an ETF fund?
“ETF fund” refers to the pooled fund behind an ETF, the vehicle that holds the underlying assets. It means the same thing as an ETF.
What is an active ETF vs a passive ETF?
A passive ETF tracks an index. An active ETF has a manager aiming to outperform, usually at a higher cost. Most ETFs are passive.
What is the difference between an ETF and an index fund?
Both usually track an index. ETFs trade on an exchange throughout the day, while index funds are priced once daily.
What is an ETF expense ratio?
The expense ratio (TER) is the annual percentage cost of holding an ETF, deducted from the fund’s returns.
What is the main risk of an ETF?
An ETF’s value can fall as well as rise, carrying the market risk of its underlying basket, plus possible tracking error and, for non-euro ETFs, currency risk. A low cost does not mean no risk.
