ETF

What it means

An ETF is an exchange-traded fund that usually tracks an index, such as a share or bond index, and trades on a stock exchange like a share throughout the day. With one purchase an investor gains exposure to hundreds or thousands of shares or bonds.

Low fees and broad diversification make it popular for long-term investing. A passive ETF does not try to beat the market, only to track it, so it needs no expensive team of analysts, which shows in lower annual costs than actively managed funds.

ETFs can be accumulating, reinvesting income, or distributing, paying out dividends. Retail investors in the EU can buy EU-domiciled funds, usually based in Ireland or Luxembourg, which have the mandatory key information document.

How it works in practice

ETFs are bought through an investment firm or bank. When choosing, compare the index, annual costs, replication method, fund size, currency and whether it accumulates or distributes, which also affects taxation.

For individuals in Slovakia, income from selling securities admitted to trading on a regulated market may be exempt if they were held for more than a year and the holding period test and other conditions are met. Dividends from distributing ETFs are taxed according to their source.

Companies can invest spare cash in ETFs, but in the accounts and for tax these are financial assets with revaluation or realised gains and losses. When investing company money, clear rules on risk and liquidity help ensure the money is available when the business needs it.

What to watch out for

Even an ETF on a broad index can lose significant value when markets fall. Diversification reduces the risk of individual companies, not the risk of the whole market, so ETFs suit long-term investing with time to recover, not short-term parking of money.

Some ETFs are leveraged or inverse and intended only for short-term trading. Their long-term results can differ markedly from the index, so they should be used only by experienced investors who understand how they work.