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ETF
An exchange-traded fund that tracks an equity, bond or commodity index as closely as possible — with low ongoing fees and continuous tradability.
What an ETF is
An ETF — short for Exchange Traded Fund — is an investment fund that trades on a stock exchange like a share. Unlike a classic actively managed fund, an ETF generally does not rely on a portfolio manager's stock picks: it tracks a predefined index as closely as possible — the MSCI World, the S&P 500 or Austria's ATX, for example.
This passive design has two important consequences. Running costs (total expense ratio, TER) typically range from 0.07% to 0.5% per year — well below actively managed equity funds, which often charge 1.5% to 2%. The strategy is also transparent at all times: an investor who buys an S&P 500 ETF knows exactly that the fund holds a proportional slice of 500 large US companies.
Replication methods
There are essentially two ways to track an index. With physical replication, the ETF actually buys the index constituents — either in full or as a representative sample ("sampling"). Investors who prize transparency tend to prefer this approach. Synthetic replication mirrors the index return through a swap agreement with a bank. It often appears with hard-to-trade indices, but adds counterparty risk.
A second distinction is between distributing and accumulating ETFs: the former pays dividends out to investors, the latter reinvests them automatically inside the fund.
A worked example
An investor uses Trade Republic to buy €100 of the iShares Core MSCI World UCITS ETF (ISIN IE00B4L5Y983) each month. The TER is 0.20% per year. Assuming an average annual return of 7% net of fees, after 20 years the portfolio would be worth roughly €52,000 — against total contributions of €24,000. The €28,000 gap reflects compounding and the broad diversification across more than 1,500 companies worldwide.
In Austria, distributed dividends and realised capital gains are taxed at 27.5% (KESt). For accumulating non-Austrian ETFs, deemed distributions (ausschüttungsgleiche Erträge) must also be reported.
What investors often ask
What is the difference between an ETF and an index fund? Every ETF is an index fund — but not every index fund is an ETF. Traditional index funds price once a day at net asset value; ETFs trade continuously on exchange.