What happens when I invest in an Exchange Traded Fund (ETF)?
When you invest in an ETF you are essentially investing in a portfolio of many different assets. ETFs are passively managed by a portfolio manager and investment team to follow a specified index. To invest in an ETF you will need to buy some units using your broker. You will also pay a management fee which is usually included in the unit price and in return for investing in the ETF you will receive distributions of the ETF’s net income.
The managing team of the ETF will invest in the securities for you, buying the underlying securities in different weights in order to accurately replicate the index or benchmark for a physical ETF or in derivatives e.g. swaps for a synthetic ETF. Investing in an ETF means that you will own units in the ETF but not the underlying securities or derivatives themselves.
Buying into an ETF means that you will receive exposure to a specific asset class. Keep in mind that if the index falls so will the ETF. The ETF price will fluctuate during the day, reflecting the market supply and demand.