Lesson 4.2 · 2 of 6 · Stocks or ETFs: what suits you
ETFs: the pros and risks explained for beginners
An ETF gives you hundreds of companies in a single purchase, at a low annual cost. But you don’t choose what it holds, you pay the charge every year, and you remain exposed to market falls, to the index’s biggest companies and to exchange rates.
Terms in this lesson
- ETF
- A fund listed on the stock exchange that buys dozens or hundreds of companies at once.
- TER
- What an ETF or fund costs you each year, as a percentage of the money invested.
- Tracking error
- How faithfully a fund copies the index it follows.
- Stock market index
- A basket of stocks that shows how a market is doing: S&P 500, DAX, BET.
Opening question
What are you actually buying when you buy one unit of an ETF tracking the S&P 500?
The fund usually owns the companies in the index, and you own part of the fund. The firm that runs the ETF is something else: the fund’s assets are held separately from its own. Nothing is guaranteed, and the index picks the companies, not you.
It does not matter if you get it wrong: trying first helps you remember.
Diversification in a single purchase
Definition
How does an ETF work?
One order, hundreds of companies.
An ETF is a fund listed on a stock exchange that copies an stock market index. When you buy a unit, you indirectly own a slice of every company in the index, in the same proportions as the index. Some ETFs, called synthetic, don’t buy the companies but receive the index’s return through a contract with a bank (a swap). You buy and sell it like a share, whenever the market is open.
Compare
Which ETF spreads your money across more countries?
ETF B. But note: on 30 September 2026, US companies made up 72.94% of the MSCI World index. “Global” does not mean evenly split between countries.
What an ETF costs and what you can’t control
- Annual charge (TER)Taken from the fund every year. For the UCITS ETFs tracking the S&P 500 on justETF’s UK list it was 0.03-0.15% a year on 28 October 2026.
- The spreadThe gap between the buying and selling price. It is small on big ETFs and can be wider on small ones that trade rarely.
- The gap to the indexAn ETF never copies its index perfectly: costs and the way it buys the companies give it a slightly different result. This is called tracking error.
Watch out
What can’t you control in an ETF?
Which companies are in it and how much each one weighs.
The index decides. In indices weighted by stock market value, big companies weigh a lot: on 30 September 2026 the 10 largest made up 27.85% of the MSCI World index, and Nvidia alone 5.81%. If you don’t want a particular company or sector, you can’t remove it from a broad index ETF.
Myth or fact?
“An MSCI World ETF splits its money equally across its 1,200-plus companies.”
Myth. Each company’s weight depends on its stock market value. On 30 September 2026 the top 10 companies made up almost 28% of the index, and US companies 72.9%.
The risks of ETFs
The S&P 500 fell by 56.8% between October 2007 and March 2009, and the ETFs tracking it fell almost as much.
If you invest in pounds or euros, a US share ETF exposes you to the dollar. If the dollar falls, you lose part of your gain even when the index rises.
An ETF on a single sector or a fashionable theme holds companies that move together. It can rise and fall much more sharply than a broad index.
Check yourself
In one year the S&P 500 rose by 10%, while the dollar fell by 10% against the pound. Roughly what did a UK investor make in pounds on an S&P 500 ETF?
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Create a free accountMyth or fact?
“If the ETF I’ve invested in closes, I lose everything I put in.”
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Create a free accountWhat would you do?
You spot an artificial intelligence ETF that has risen hugely over the past year. What do you do?
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Create a free accountWhat you learned
- An ETF gives you hundreds of companies in a single purchase, at a low annual cost.
- You don’t pick the companies: the index decides, and the biggest ones weigh a lot.
- An ETF stays exposed to market falls, to exchange rates and, for thematic ones, to a single niche.
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Save your progress with a free accountLessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: the monthly MSCI World index factsheet (MSCI); TERs of UCITS S&P 500 ETFs: justETF’s UK list; the S&P 500’s closing high of 9 October 2007 and low of 9 March 2009.