What are ETFs and how do they work?

Category: etfs-faq

An ETF, or exchange traded fund, is a type of investment fund that’s traded over an exchange, like an ordinary stock. These funds work by having an investment thesis of their own (e.g. green energy, or disruptive technology) which they use as a guide to purchase assets that fit into that specific thesis.

An ETF can hold all manner of assets in its portfolio including stocks, bonds, currencies, commodities, crypto, and more. In this way, when you purchase the ETF, your capital is proportionally exposed to all the underlying assets that the ETF owns.

The ETF itself tries to maintain its valuation at a level that’s comparable to the net asset value of all the assets it holds, however, depending on the sector, it’s not unheard of to have ETFs trade at a premium when compared to the assets held. 

The real value of ETFs is that they allow investors to allocate capital to specific “themes” without having to trade the underlying assets they hold. ESG (Environmental, Social, and Governance) ETFs are an example of an investment that follows a specific philosophy. The same goes for crypto or emerging market ETFs.