What is an ETF?
A fund that holds many companies at once, bought and sold like a single share.
How an ETF works
A fund manager buys a pool of assets — say, shares in the 500 largest American companies — and then splits ownership of that pool into small units. Each unit is a share of the ETF, and it trades on an exchange like any other share.
When you buy one unit, you own a tiny slice of all 500 companies. You never had to choose between them, or place 500 separate orders.
That is the whole point. The heavy lifting — buying, holding, and rebalancing hundreds of positions — is done once by the fund, and you pay a small annual fee so you don't have to do it yourself.
A worked example
Invest €100 in an S&P 500 ETF
About €7 of it goes to Apple, €6 to NVIDIA, and small amounts to the other 498 companies.
One company has a terrible year
If it falls 50%, your €100 loses about €1. Had you put everything into that single company, you would be down €50.
The index rises 8% over the year
Your holding is worth about €108, minus the fund's small annual fee. That fee is the second thing worth checking.
Where it can go wrong
Diversification lowers the risk that a single company sinks you. It does not protect you from a whole market falling — in a broad sell-off, almost everything in the basket falls together.
Narrow ETFs also defeat the purpose. A fund that holds only one industry can be almost as concentrated as picking stocks one by one. 'ETF' does not automatically mean 'diversified'.
Even the name can mislead you. A 'global technology' ETF can have half its money in five American companies. What you actually bought is in the list of holdings, not in the name.
The costs to check
| Fund type | Typical fee | Cost on €10,000 / year |
|---|---|---|
| Broad index ETF | 0.07% | €7 |
| Sector or thematic ETF | 0.45% | €45 |
| Actively managed fund | 1.20% | €120 |
Key terms in this lesson
- Index
- A published list of companies used to measure a market, like the S&P 500.
- Expense ratio
- The fund's annual fee, taken automatically out of what you hold.
- Diversification
- Spreading money across many assets so no single one decides your fate.
- Accumulating fund
- A fund that reinvests your dividends instead of paying them out in cash.
Quick check
You own a broad index ETF and one company inside it falls 40%. Roughly what happens to your holding?
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