How to invest in ETFs

Exchange-traded funds (ETFs) are the foundation of many investors’ portfolios. Some even choose to invest entirely in ETFs. If you’re sold on the idea of including one (or several) ETFs in your portfolio, finding out how to invest in ETFs is your next step.

ETFs come in all shapes and sizes and you can find them on most of the best trading platforms and apps. We’ll cover where you can invest in ETFs, how straightforward it is, and other valuable insights about these funds.

Step-by-step guide: How to invest in ETFs

1. Research ETFs you want to invest in. Not all platforms will have the ETF you want in stock (excuse the pun). Once you know the ETFs you want to buy, this can help narrow down investing platforms.
2. Open a share dealing account. After finding your ideal investing platform, you’ll need your basic personal details to hand when opening your account. It’s best to have some ID ready along with your national insurance (NI) number.
3. Fund your account. Once you’ve picked a platform and opened an account, the next step is to deposit funds. Most will allow this via bank transfer or debit card.
4. Choose how much you want to invest. With an investment account set up, and funds deposited, you’re ready to choose the amount you want to invest in an ETF.
5. Buy the ETF. Just hit buy. It’s as simple as that.

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What are the best ways to invest in ETFs?

Because ETFs are listed on stock exchanges, the best way to invest is by using a share dealing platform (aka a brokerage account). These allow you to access ETFs which are trading openly on stock exchanges, acting as a middleman for you to buy them.

There are several platforms offering free ETF investing, which is ideal. We’ve set out which ones do this, below.

Where can you invest in ETFs?

Below are some of the best options for places to buy ETFs and the reasons why.

Platforms offering ETFs to invest in

• Freetrade. Zero commission when investing in over 400 ETFs. Plus an excellent app with an easy-to-use interface.
• InvestEngine. A platform wholly focused on ETFs. It’s free to create and hold a DIY portfolio of ETFs (including the use of a stocks and shares ISA). There are over 600 ETFs to choose from and you can opt for a managed ETF portfolio for a competitive 0.25% annual charge.
• eToro. Has a slightly smaller ETF range (325) and the platform isn’t quite as simple as some others, but it’s zero commission when you invest in ETFs and there are lots of useful platform features.
• IG. Massive range of over 5,000 ETFs. The drawbacks are that the fees aren’t the cheapest, and the platform interface is slightly clunky.
• interactive investor. Provides ETF research inspiration with the Super 60 and ACE 40 ethical lists. Over 1,000 ETFs to choose from. A free regular investing service is also a bonus. This means if you schedule a monthly direct debit ETF investment of at least £25, you don’t pay any commission for that trade.
• Nutmeg. A robo-advisor platform that manages an ETF portfolio for you based on your goals and risk tolerance. There’s a decent selection of ready-made portfolios, but you’ll pay a fee for this expert management.

Have a look at our table to compare all platforms that offer ETFs in detail.

Is it easy to invest in ETFs?

It can be. However, the process of investing in an ETF will depend on the platform you’re using.

Some investing platforms are designed with new investors in mind. And seeing as ETFs are typically seen as a suitable investment for beginners, some platforms make buying ETFs a piece of cake.

Unfortunately, that’s not the case with all providers. A rule of thumb is that if buying individual stocks on a platform is complex, it’s likely to be the same for ETFs.

Platforms target different types of investors, so you might want to pick a beginner-friendly platform with a great user interface, such as Freetrade, Nutmeg or InvestEngine.

Case study: Anna found it easy to invest in ETFs once she found the right platform

"When I first learnt about investing, I was completely sold on the idea of using exchange-traded funds (ETFs), but lots of people leave out the details on where to invest in them. Now that I’ve found a low-cost platform with a decent choice of options, investing regularly has become part of my routine on payday.

If there’s one thing you’d tell a friend who’s thinking of investing in ETFs, what would it be?

Setting up a direct debit or regular investment for ETFs makes the process so much easier and stress-free; everything happens automatically and I barely have to think about it."

Anna O'Reilly

London

Should I invest in ETFs?

This depends on your goals, risk tolerance, and time horizon. ETFs can play a useful part in your portfolio because:

• They tend to have low ongoing costs.
• Making one ETF investment containing multiple stocks can reduce your trading commission costs vs buying more than one individual stock.
• An ETF gives you an automatic level of diversity.
• A broad market index-tracking ETF can be less volatile than other types of investments.
• Most share dealing platforms will provide you with the option to invest in ETFs.

So, there are plenty of reasons why you might want to invest in ETFs, but the final decision comes down to what you want as an investor and your long-term plans for your portfolio.

Is investing in ETFs profitable?

It can be, but it depends on the ETF you invest in. Over the years, plenty of markets and industries have grown, and ETFs tracking those sectors would have been profitable.

For example, a low-cost ETF tracking the S&P 500 index would have outperformed over 90% of actively managed large-cap funds between 2007 and 2022.

However, some markets – like Japan – and some investing themes – such as certain emerging market stocks – failed to grow significantly during that period, so that flat (or negative performance) would result in a less profitable ETF investment.

Advantages of investing in ETFs

• Low cost. Many ETFs have low ongoing costs, meaning you get to keep more of any rewards.
• Automatic diversification. Most ETFs contain a basket of stocks and investments, giving you some diversity from the outset.
• Lots of choice. These days, there are ETFs covering just about every area of investing you can imagine. There are classic options tracking the FTSE 100 or the S&P 500, for example, but there are also ETFs for robotics, mining, space travel, clean energy, and much more.
• Simplicity. If you want to invest in a whole country or industry, using an ETF removes most of the legwork and is less effort than picking individual stocks (and less risky in some instances).
• Efficient. You don’t need to worry about managing the investment because you’re not in direct control of the investments going in or out of the ETF.

The risks when investing in ETFs

• Performance. Most ETFs track whole markets or industry benchmarks. By definition, this means you’ll never get market-beating returns.
• False sense of security. Although ETFs offer a level of diversity, some investors get lulled into thinking it gives them a perfectly diversified portfolio when many ETFs are heavily weighted to the top few stocks.
• Finding an ETF. Each platform offering ETFs has a different selection so you need to find a platform that lets you invest in the one you want.
• Sneaky pricing. Some ETFs track the same markets or investments but charge investors a higher ongoing charge than a similar ETF using the same index or benchmark (what is essentially the same investment).
• Lack of control. Although ETFs can simplify investing, you have no control over the investments held in a fund.

Expert comment: What does "UCITS" mean?

George Sweeney

Finder Money Expert

When you start shopping around for ETFs to invest in, you'll notice that almost every option you see will have the letters, "UCITS" at the end of the name.

This stands for "Undertakings for Collective Investment in Transferable Securities". Rolls off the tongue doesn't it? It's an EU framework created to make sure funds are being advertised and marketed properly, reaching a certain standard.

Primarily, this means including a "key investor information document" (KIID). These rules are technically voluntary, but most ETFs abide by them. If you find an ETF that isn't UCITS compliant, it's wise to do even more due diligence and research.

Many popular US ETFs aren't available to UK investors because they don't comply with UCITS.

Bottom line

Investing in ETFs can lay a solid foundation for your portfolio, and it can add some versatility around the edges – covering all sorts of themes, sectors, and industries.

Learning how to invest in ETFs is straightforward enough. But the challenge is finding suitable ETFs for what you need, and a platform that lets you invest in the ETFs you want. Remember that although ETFs can play a leading role in your portfolio, you still need to consider the wider picture along with the pros and cons.

Frequently asked questions

• Are ETFs a good way to invest?

  Yes, there are plenty of advantages to investing in ETFs. They're often cheap, diverse, and less volatile than some other types of assets. But it's important to remember they're not perfect, and may not be right for you.

• Which ETFs perform best?

  We have a whole guide on best ETFs for November 2024 that we update every month. Head there to see top ETFs to buy.

• Which platforms are best for investing in ETFs?

  There are loads of broker options out there for investing in ETFs in the UK, so it depends on what you're looking for. Lowest fees? Widest ETFs selection? Beginner friendly app? Our best ETFs brokers page will help you find the best platform for you.

• Are ETFs good for first-time investors?

  They can be as you're able to invest in a whole stock market or sector with a single investment. This removes the need to do as much detailed analysis into individual stocks and shares because, with an ETF, you don't get to choose what's held in the fund. However, you should still do plenty of research to make sure it's a suitable investment for your goals and risk tolerance.

• Is an ETF better than a stock?

  It depends on what you need. Most ETFs are made up of stocks; the only difference is that an ETF gives you access to multiple stocks with a single investment. However, picking individual stocks can give you more freedom with your investing choices.

• Do ETFs pay dividends?

  Some do. Not every ETF will pay dividends, but if the ETF contains stocks that pay dividends, you’ll receive this income in your account. Ideally, it’s best to use a stocks and shares ISA to ensure you don’t pay any UK tax on potential dividends. Find out more about this in our guide to stocks and shares ISAs.

• Do you pay tax on ETF profits?

  Yes. Unless you’re holding your ETFs in a stocks and shares ISA, you may have to pay capital gains tax (CGT) or dividend tax on any profit above your yearly allowances.

Written by

George Sweeney, DipFA

Deputy editor

George is a deputy editor at Finder. He has previously written for The Motley Fool UK, Nasdaq, Freetrade, Investing in the Web, MoneyMagpie, Online Mortgage Advisor, Wealth, and Compare Forex Brokers. He's focused on making personal finance and investing engaging for everyone. To do this he draws from previous work and his Level 4 Diploma for Financial Advisers (DipFA), sharing what he’s learnt. When he’s not geeking out about money, you’ll find him playing sports and staying active. See full bio

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