“I want to invest in the stock market, but I don’t know which company to pick.” You don’t need to pick any: you can buy hundreds of companies at once with a single order. That is what ETFs are for.
What an ETF is
ETF stands for exchange traded fund. It is a basket of investments, usually shares in many companies, that is bought and sold on the stock exchange as if it were a single share.
Think of a greengrocer. You can buy apples, pears and oranges one by one, choosing each piece, or take a ready-made box with a bit of everything. The ETF is the box. You buy a unit and you own a small piece of everything inside.
An ETF that tracks the S&P 500, the index of the 500 largest US companies, holds those companies. The iShares Core S&P 500, to name one of the best known, had 503 holdings: slightly more than 500 because some companies list two classes of share. With one purchase you own a part of each. We name it to explain the product, not as a recommendation.
How it works inside
Most ETFs do not try to be clever: they copy an index, a list of companies drawn up with fixed rules. If a company enters the index, the ETF buys it. If it leaves, the ETF sells it. Nobody decides which share is cheap or which will rise. This is called passive, or index, management.
That is where its advantage comes from: cost. With no team of analysts picking shares, the annual fee is minimal: the ETF in the example charges 0.07% a year, 7 euros for every 10,000. An actively managed fund charges a good deal more, and that difference, compounded year after year, is a lot of money, as we show in Compound interest: what it is and how it works.
Paying a manager to pick shares almost never pays off. 90.49% of US large-cap equity funds did worse than the S&P 500 over 15 years, after fees, according to S&P Dow Jones Indices. The European edition shows the same pattern.
And the risk that matters is not the price falling one year, but losing what you put in for good. With a single company, that happens if it goes bust. With five hundred, all of them would have to. The ETF’s price will fall in bad spells, sometimes a lot, but for someone who does not have to sell at that moment a fall that recovers costs nothing. We go into it in The safest investment there is.
Five hundred companies is not always diversification
Owning many companies is not the same as being diversified. If all five hundred are from the same country and a good share from the same sector, a single problem can bring them all down together. In the S&P 500 all of them are American, and technology made up 38.0% of the index on 30 June 2026.
It is like having five umbrellas at home and no coat: many items, one kind of protection. What spreads risk is combining things that do not move together: companies from different countries and sectors, and some gold, which depends on no company at all.
Where they come from
The first index fund for ordinary savers was launched by John Bogle, founder of Vanguard, on 31 August 1976. He hoped to raise 150 million dollars and raised 11.3, not enough to buy all 500 companies in the index: it bought 280. On Wall Street they called it “Bogle’s folly”.
The ETF came later, when someone put that basket on the stock exchange so it could be bought and sold at any moment. The first one listed in Toronto on 9 March 1990, and in January 1993 the SPDR, which tracks the S&P 500, arrived in New York. That folly is now the way a good part of the world invests.
The types of ETF
| Term | What it means |
|---|---|
| Accumulating (Acc) | The dividends the companies pay are reinvested automatically inside the ETF. Nothing lands in your account, but each unit is worth more. |
| Distributing (Dist) | Dividends are paid out to you in cash from time to time, and in most countries they are taxed in the year you receive them. |
| Physical replication | The ETF actually buys the shares in the index. |
| Synthetic replication | The ETF does not buy the shares: it signs a contract with a bank that promises to pay it whatever the index does. It adds a risk, that the bank does not deliver. |
To start with, the usual choice is accumulating with physical replication: dividends are reinvested without going through the taxman every year, and what is inside are the real shares, not a third party’s promise. The word UCITS in the name refers to the European rules for funds sold to ordinary savers in the EU. From Europe you will almost always buy these European versions, and not the American ETFs, for a legal reason we explain in How to invest in the S&P 500 from Europe.
ETFs best avoided
Leveraged and inverse. The first multiply what the index does each day by two or three, up and down; the second make money when the market falls. They are designed for trading over days: held for years they can lose money even if the index ends where it started.
Bond ETFs. Inside they are loans to governments or companies at fixed interest, with the problem of any bond: what you can make is capped and usually sits close to inflation, or below it, while the risk of default is real.
Thematic. They buy whatever is in fashion that year, and they usually arrive once the fashion has already risen.
ETF or index fund
An index fund tracks an index just like an ETF, but it is not listed on the stock exchange: you buy and sell through the fund manager, at the day’s closing price. In some countries the difference matters for tax reasons. We explain it in Index fund or ETF: what is the difference.
What to check before buying your first one
Which index it tracks, and how many countries and sectors are inside. How much it charges a year, the TER, which is the total fee. Whether it is accumulating or distributing. Whether replication is physical. And whether it is UCITS.
A broad ETF is a good way to start. It is not the only one: over time you can build your own portfolio with companies you understand, picked one by one. Where to buy it we explain in The best brokers for investing from Europe. What fits your case and how to put it into a monthly plan is what we work on in the first session. The earlier steps are in Start investing from scratch.
Educational content. Not personalised financial advice or a recommendation to buy any product. The ETFs mentioned are examples to explain the concept.