What is an ETF and how does it work?
An ETF (exchange-traded fund) is a fund whose shares are bought and sold on a stock exchange during the trading day, like a company’s shares. Most track an index, and the value of an investment can fall as well as rise.
- ISA allowance
- £20,000
- Total across all your adult ISAs in the tax year. The government has said it will stay at £20,000 until 05/04/2031.
- GOV.UK: Individual Savings Accounts (ISAs)
- FSCS investment protection
- £85,000
- Per eligible person, per firm, for authorised investment firms that fail after 01/04/2019. It does not cover falls in the value of investments.
- FSCS: Investments
Tax year 2026/27. Checked 22/09/2026.
What an ETF is
A fund pools many people’s money and invests it for them. An ETF is a fund whose shares are listed on a stock exchange, so they are bought and sold through a share-dealing account, ISA or SIPP at the price on the exchange, at any time the market is open.
Most ETFs track an index, such as the FTSE 100 or a world index, either by holding the shares in it or by using contracts that pay the index’s return. A smaller number are actively managed.
How ETFs differ from other funds
Unit trusts and OEICs are bought from and sold back to the fund manager, usually once a day at a price set after the market closes. ETF shares change hands on the exchange throughout the day, so the price depends on the market at that moment.
Investment trusts also trade on the stock exchange, but they are companies with a fixed number of shares, and their share price can move well above or below the value of what they own. An ETF’s price usually stays close to the value of its holdings, because large dealers create or cancel ETF shares when the two drift apart.
What an ETF costs
Three separate costs apply:
- The ongoing charge (OCF): a yearly percentage taken from the fund’s value. Fundology shows each fund’s charge as pounds on £10,000.
- The spread: the gap between the buying and selling price on the exchange, usually small for large ETFs and wider for less-traded ones.
- Platform and dealing charges: set by the platform used, not by the ETF.
Accumulating or distributing
Many ETFs come in two versions. Accumulating (“Acc”) shares keep dividends and interest inside the fund, so they show up as a rising price. Distributing (“Dist”) shares pay them out as cash, usually a few times a year.
ETFs sold in the UK
Most ETFs sold to UK investors are UCITS funds — a European standard with rules on spreading risk — usually based in Ireland or Luxembourg. The same ETF can be listed several times, in pounds, dollars or other currencies, each with its own ticker.
ETFs listed in the US usually do not publish the key information document UK rules require, so most UK platforms do not offer them to individual investors.
Holding ETFs in an ISA or SIPP
Many ETFs can be held in a stocks and shares ISA, where income and gains are free of UK tax, or in a SIPP. The platform shows which ETFs it offers in each account.
The risks
An ETF that tracks a market falls when that market falls. Leveraged and inverse ETFs, which multiply or reverse daily moves, behave very differently over longer periods from an ordinary tracker.
FSCS protection can cover some losses if a UK-authorised firm fails; it does not cover falls in the value of investments. Capital at risk. Past performance is not a guide to future returns. The value of investments can fall as well as rise.
Questions people ask
›Is an ETF the same as an index fund?
Not exactly. Many index funds are ETFs, but an index fund can also be a unit trust or OEIC bought from the manager once a day, and some ETFs are actively managed rather than tracking an index.
›Can I hold ETFs in an ISA?
Many ETFs can be held in a stocks and shares ISA, where income and gains are free of UK tax. The platform used shows which ETFs it offers in an ISA.
›What do Acc and Dist mean on an ETF?
Acc (accumulating) shares keep income inside the fund, so it shows up as a rising price. Dist (distributing) shares pay income out as cash, usually a few times a year.
›Why can I not buy some US ETFs in the UK?
ETFs listed in the US usually do not publish the key information document UK rules require for individual investors, so most UK platforms do not offer them. Similar UCITS ETFs listed in London usually exist.
Related guides
Sources
This is information, not advice. Tax treatment depends on your circumstances and can change. For free, impartial guidance, MoneyHelper (backed by the government) can help; for a personal recommendation, speak to a regulated financial adviser.