What are ETFs? A guide for new investors
You’ll often bump into the acronym ‘ETF’ when you explore investing. (The finance industry does love shortening everything to three or four letters.)
ETF stands for ‘Exchange-Traded Fund’, and while the name sounds a bit technical, the idea behind it is pretty straightforward:
Fund: a pool of investors’ money that’s used to invest in companies, bonds or other assets. When the fund’s investments go up or down in value, investors share in those gains or losses.
Exchange-traded: you can buy and sell it on a stock exchange, similar to how you’d trade shares
Put those two parts together and you get an ETF: a single product that gives you access to lots of different investments at once. That could mean shares in big companies, bonds issued by governments, commodities like gold, or a blend of different assets packaged together.
Think of it like ordering a tapas platter instead of choosing each dish individually – one choice that gives you a bit of everything, without the pressure of picking perfectly.
Monzo investments include ETFs, which invest in shares in companies. They’re based on a theme or particular region, so you can invest in what matters to you. And a bit like tapas, you can pick something familiar, or try something new and exciting.
Why do ETFs exist?
ETFs were designed to make investing easier, cheaper and more accessible. Instead of researching dozens of individual companies, an ETF lets you invest in a whole group at once.
What makes ETFs a bit different is that they’re traded on stock exchanges, much like individual shares. This means they can be bought and sold continuously throughout the trading day and have real time pricing.
Some ETFs track things like:
The biggest 100 companies in the UK
Tech companies in the US
Companies working on renewable energy
Government or corporate bonds
Themes like renewable energy or robotics
And because lots of ETFs just follow a ready-made list of investments (instead of being hand-picked by a fund manager), they usually come with lower fees.
How do people use ETFs?
People use ETFs in lots of ways, depending on their goals and preferences. Here are two common examples:
Nimisha, the long-term builder
Nimisha’s in her early 30s, has just started thinking more seriously about her future, and wants to grow her money gradually. She chooses a broad global ETF – one that includes thousands of companies from all around the world.
She likes that:
It gives her instant diversification
It keeps costs low
She doesn’t have to worry about picking winners and losers
She accepts that:
It isn’t actively managed
It isn’t managed to a specific risk level, so the value could go up and down quite a lot
There will probably be some investments in the fund that grow faster than others. That’s helpful when markets are bumpy, because it stops any single area from having too much impact. But it also means that if one industry does really well, the overall result Nimisha sees may be more muted, because it’ll be a bit diluted by the lower-performing areas in the fund.
Nimisha invests a small amount regularly and leaves it to grow over the years. She doesn’t check it every day (although she’s tempted). It’s a hands-off approach that suits her.
Rachel, the theme enthusiast
Rachel’s passionate about green energy. She knows investing involves risk, but she’s comfortable leaving her money to invest over a longer term, and riding the ups and downs. She wants part of her portfolio to reflect her values, so she buys an ETF focused on renewable energy companies: solar, wind, batteries and clean-tech innovation.
There is some diversification here – although it’s based around one theme, Rachel’s spread the risk by investing in different types of renewable energy sources, rather than going all in on one, like solar power. But it’s not as diverse as Nimisha’s global ETF.
She understands this kind of ETF may rise and fall more dramatically because it’s tied to a specific theme. If that theme goes well, that’s great. But if it doesn’t, she doesn’t have the same buffer that Nimisha has in her global ETF.
Both Nimisha and Rachel use ETFs in ways that suit their own goals and interests.
The benefits of ETFs
While ETFs aren’t the right fit for everyone or every situation, people often like them because they can:
Help spread risk: ETFs bundle lots of investments together, so you’re not relying on just one company or bond to do well. In Monzo’s investment themes, this diversification comes built in, though some ETFs are more spread out than others, depending on what they focus on.
Be cost-effective: many ETFs simply follow a set list of investments instead of having a fund manager hand-pick everything. That can make them cheaper to run.
Be easy to buy and sell: ETFs are traded on stock exchanges, which means there are usually lots of buyers and sellers. That makes them generally easy to trade. With Monzo, you buy and sell ETFs once a day at a single daily price, rather than seeing live prices throughout the day. This means trades are grouped together, which can help keep costs down.
Offer lots of choice: from broad markets to niche themes, there’s an ETF for almost everything! There’s even an ETF dedicated to companies involved in the production of garlic – proving that if humans care about something, someone’s probably tried to turn it into an ETF. At Monzo, we keep things simple by offering curated themes rather than hundreds of niche options.
Things to keep in mind
Even though ETFs can make investing feel simpler, they’re still investments, which means:
Their value can go up or down, and you could get back less than you put in
Different ETFs come with different risks, depending on what they invest in
Costs, while often low, still vary between funds
Some ETFs are designed for more experienced investors, especially those that use leverage (meaning they borrow to invest) or derivatives. This means they can jump up and down in value much more dramatically, so they’re usually aimed at people who already understand how these products work.
The bottom line? Always take the time to read the details before you invest. If you’re still not sure where to start, take a look at our handy ETF checklist.
Are ETFs right for me?
Before anything else, it’s worth making sure you feel ready to invest. That means asking yourself a few questions, like whether you’re comfortable seeing the value of your money go up and down, how long you’re planning to invest for, and whether you have a financial buffer in place for short-term or unexpected needs.
ETFs can be a helpful way to invest in lots of different things at once, but whether they’re right for you depends on your goals and preferences.
Whatever you decide, the most important thing is taking the time to understand how any investment works – ETFs included – before choosing whether it fits what you’re trying to achieve.
The value of your investments could go up or down and you could get back less than you put in. You need a Monzo current account to use Investments. UK residents 18+. Ts&Cs apply.