Exchange traded funds (ETF) are a relatively new way to participate in the stock market. First launched in the US in the early Nineties, there are now about 130 ETFs listed in America and around 100 in Europe.

ETFs are a kind of index tracker fund. Just like index trackers, they invest in a basket of shares to mirror the performance of a stock market index. Investors buy shares in the fund and if the index rises so does the share value. If it falls, the value of an ETF holding will also fall. These were said to be a whole new type of investment best described as a cross between investment trusts and unit trusts.

So, How do they resemble investment trusts? Just like investment trusts, ETFs trade on the Stock Exchange and you buy ETFs through a stockbroker. In addition, exactly like traditional share prices, the price of ETFs vary throughout the day. Traditional tracker unit trusts or mutual funds change price only once in a day.

What are the advantages of ETFs?
ETFs are an inexpensive way to gain exposure to an index. Investors don't have to pay stamp duty, there are no upfront fees when you invest and annual charges are less than 0.5% - lesser than most index funds or unit trusts. And they are a particularly inexpensive way of investing in foreign markets or in specific sectors or industries. The only other cost is stockbroker’s commission - this can work out at less than $10 a deal.

That sounds like a good deal - are there any pitfalls? If you want to put money into an ETF over a period of time, dealing costs charged by a stockbroker can quickly add up.