What Is an ETF? Exchange-Traded Funds

By Tom Ashby, Editor · Updated 10 October 2026

8 min read · Facts checked against official sources on 10 October 2026

In short

An ETF is a fund listed on a stock exchange, so you buy and sell it during the day at the market price, like a share.
Most ETFs track an index. Costs include the ongoing charge, the buying and selling spread, and any dealing fee.
UK investors don't pay the 0.5% stamp duty on qualifying ETFs that applies to most UK share purchases.
Outside an ISA or pension, check an overseas ETF has HMRC reporting fund status, or gains are taxed as income.
ETFs can fall in value, and leveraged or inverse ETFs can lose money even when the market moves your way.

Stamp duty on qualifying ETFs (0.5% on most UK shares): 0%
FSCS limit if your investment platform fails: £85,000
New product summaries fully replace KIDs: 8 June 2027

On this page

What is an ETF, in simple terms?
How is an ETF different from a normal fund?
How does an ETF’s price stay close to its real value?
What is the difference between physical and synthetic ETFs?
What does an ETF cost?
Accumulating or distributing ETFs?
Do you pay stamp duty on ETFs?
How are ETFs taxed outside an ISA or pension?
Can you hold ETFs in an ISA or SIPP?
What are the risks of ETFs?
What documents should you read before buying an ETF?
ETF or index fund: which suits you?
Related guides
Sources

An exchange-traded fund (ETF) is a fund whose shares are listed on a stock exchange. Like any fund, it pools money from many investors and spreads it across many investments, often all the companies in a market index such as the FTSE 100. Unlike a traditional fund, you buy and sell it through the stock exchange during the trading day, at whatever the market price is at that moment. This guide explains how ETFs work, what they cost, how they’re taxed in the UK and the risks to understand first.

What is an ETF, in simple terms?

An ETF is a basket of investments you can buy in one go, traded like a single share. Buying one share of an ETF that tracks the FTSE 100 gives you a small slice of all 100 companies in that index. The FCA defines an ETF as a fund with at least one class of shares or units traded throughout the day on at least one trading venue, with at least one market maker keeping its price close to the value of what it holds.

Most ETFs are index trackers: they aim to match the return of an index, minus their charges, rather than trying to beat it. If you’ve read our guide to index funds, an index ETF does the same job. The difference is mainly in how you buy and sell it.

How is an ETF different from a normal fund?

In the UK, traditional funds are usually unit trusts or OEICs. The table below shows the practical differences most investors notice.

	ETF	Unit trust or OEIC
Where you buy it	On a stock exchange, through a platform or broker	Directly with the fund manager, usually through a platform
When the price is set	Continuously during the trading day	Usually once a day, at a price worked out after you place your order
Price you pay	Market price, which can be slightly above or below the value of what the fund holds	The fund’s own unit price
Typical extra costs	Bid-offer spread, and dealing charges on many platforms	Often free regular investing on platforms
Stamp duty on purchase	None for qualifying ETFs	None on buying units from the manager

Neither type is better in itself. An index ETF and an index fund tracking the same market will usually give very similar returns, and the deciding factors tend to be cost and how you like to invest.

How does an ETF’s price stay close to its real value?

An ETF’s market price can drift away from the value of the investments it holds, known as its net asset value or NAV. Specialist firms called authorised participants keep the two close. When the ETF trades above its value, they can create new ETF shares and sell them; when it trades below, they can buy shares and hand them back to the fund. The FCA notes that this keeps prices close to NAV, but gaps can still open up, particularly in fast-moving markets or for ETFs holding less frequently traded assets.

What is the difference between physical and synthetic ETFs?

ETFs track their index in one of two ways:

Physical ETFs buy the actual investments in the index: all of them (full replication), or a representative sample.
Synthetic ETFs don’t hold the index itself. They use a contract called a swap, under which a bank agrees to pay the index’s return.

A synthetic ETF depends on the bank on the other side of the swap, called the counterparty, so it carries counterparty risk. ESMA’s guidelines for European funds require an ETF to state in its prospectus which method it uses and explain what it means for investors. Most UK investors buy European-domiciled ETFs that follow these rules. Physical ETFs can carry a similar risk if they lend out their holdings to other firms for a fee, which the fund documents will also disclose.

What does an ETF cost?

There are usually four costs to look at:

Ongoing charges figure (OCF). The yearly cost of running the fund, taken from its value. MoneyHelper points to the OCF as the main number to compare between funds.
The spread. There are two prices at any moment: a slightly higher one to buy and a lower one to sell. The gap is a cost each time you trade. Spreads are usually small for large, popular ETFs and wider for niche ones.
Dealing charges. Many platforms charge a fee each time you buy or sell an ETF, as they do for shares. Some offer cheaper regular investing.
Platform fees. The charge for holding the account, which applies to ETFs and funds alike. Our platform fees guide explains how they work.

The return you actually get compared with the index is called the tracking difference. It’s mostly the result of charges, but other factors play a part. ETF documents also report tracking error, which measures how much that difference varies over time. Lower is generally better for both.

Accumulating or distributing ETFs?

Many ETFs come in two versions. Distributing (or income) ETFs pay dividends out to you as cash. Accumulating ETFs reinvest them in the fund automatically, so your holding grows without you doing anything.

Inside an ISA or pension the choice makes no difference to tax. Outside them it doesn’t help to pick accumulating: HMRC taxes reinvested income in the same way as if it had been paid out, so you may owe tax on dividends you never received in cash.

Do you pay stamp duty on ETFs?

Usually not. When you buy shares in a UK company you normally pay 0.5% stamp duty or Stamp Duty Reserve Tax. Since April 2014, regulations have exempted purchases of qualifying ETFs from both, so buying a UK-listed ETF that meets the definition doesn’t attract the 0.5% charge. Most ETFs sold in the UK are domiciled abroad and aren’t subject to the 0.5% charge in any case. Either way, that’s one reason ETFs can be cheaper to buy than individual UK shares.

How are ETFs taxed outside an ISA or pension?

Many ETFs sold in the UK are domiciled abroad, often in Ireland or Luxembourg. For overseas funds, HMRC’s reporting fund rules matter:

If the ETF has reporting fund status, a gain when you sell is subject to Capital Gains Tax, which has a £3,000 annual exempt amount in 2026/27.
If it doesn’t, the gain is taxed as income, usually at a higher rate.

You can check an ETF’s status on HMRC’s list of approved offshore reporting funds, which is updated monthly, or in the ETF’s documents. Reporting funds also report income that hasn’t been paid out, and you’re taxed on that too. None of this applies inside a stocks and shares ISA or a pension. Our guide to tax on investments covers dividend tax and Capital Gains Tax in more detail.

Can you hold ETFs in an ISA or SIPP?

Yes. ETFs are among the most common holdings in stocks and shares ISAs and in SIPPs, which removes the tax points above. HMRC’s ISA rules allow shares listed on a recognised stock exchange and units in authorised or FCA-recognised funds, which covers mainstream ETFs. One exception: since 6 April 2026, UK cryptoasset exchange-traded notes can’t be newly bought in a stocks and shares ISA, although they can be held in an innovative finance ISA.

What are the risks of ETFs?

Market risk. An ETF rises and falls with whatever it tracks. A FTSE 100 ETF falls when the FTSE 100 falls.
Currency risk. An ETF holding overseas shares is affected by exchange rates, even if you buy it in pounds.
Leveraged and inverse ETFs. These aim to multiply an index’s daily move, or move in the opposite direction. Most reset every day, and the FCA warns that over longer periods this can cause value to decay even when the market moves in your favour. They’re designed for short-term trading.
Niche ETFs. ETFs tracking narrow themes or small markets can have wider spreads, higher charges and bigger price gaps.

Is an ETF protected if something goes wrong?

The FSCS doesn’t cover losses from investments falling in value. If the platform holding your ETFs fails and can’t return them, you may be able to claim up to £85,000 per person, per firm. Claims about an overseas fund’s own operator or depositary are unlikely to be covered by the FSCS, and firms selling recognised overseas funds must tell you this.

What documents should you read before buying an ETF?

Until recently, ETFs came with a short Key Investor Information Document (KIID) or Key Information Document (KID). The UK is replacing both with a new product summary under the FCA’s Consumer Composite Investments rules. The change started on 6 April 2026 and becomes compulsory on 8 June 2027, so for now you may see either document. Both show the fund’s aims, risks and costs. The ETF’s factsheet shows what it holds, its charges and its tracking difference.

ETF or index fund: which suits you?

We can’t say which is right for you, but these practical points usually decide it:

How you invest. If you invest a fixed amount every month, a platform’s free regular investing into funds may be cheaper than paying a dealing charge for each ETF purchase.
How your platform charges. On a flat-fee platform, ETFs and shares can be the cheaper way to hold a large portfolio. Percentage-fee platforms sometimes cap fees on ETFs but not on funds.
What’s available. Some markets and themes are only available as ETFs, and some platforms offer a wider range of one or the other.

Whichever you choose, the charges are the one thing you know for certain in advance. Our compound interest calculator shows how much difference they make over time.

Sources

Our guides are general information and education, not personal financial advice. If you are unsure whether an investment is right for you, speak to a regulated financial adviser. Capital at risk. Investments can fall as well as rise, and you may get back less than you put in.