Investing Basics: Beginner’s Guide to ETFs in the UK & Europe

 

Investing can feel complicated, but it doesn’t have to be. Whether you’re planning to save for the future or simply want to learn more about growing your money, ETFs offer a low-cost, easy-to-understand option for new investors – guest post by Millie Fuller

 

By gaining the right knowledge and experience over time, you can quickly get the hang of ETFs. Let’s look at this in more detail.

 

What are ETFs? Exchange-Traded Funds (ETFs)

are seen as a straightforward starting point for those who are just beginning their investing journey. They allow investors to put their money into several companies or assets at once, rather than buying individual shares. They’re usually easy to buy and sell, low-cost, accessible, and diversified.

 

ETF Types Beginners Will Come Across

 

Here are some of the most common types of ETFs beginners may encounter when starting out. Understanding them is a great place to start.

 

Equity

 

Instead of buying individual company shares, buying a single equity ETF means you hold a basket of stocks, giving you exposure to several companies at once. Investors choose this option because it lets you invest in a whole portfolio at once, offers growth potential, and helps diversify your investments.

 

Bond

 

These usually focus on government or corporate bonds and are often used to provide a more stable income as bonds pay interest at regular intervals. Many investors decide to use bond ETFs to balance their portfolios. At the same time, a single bond ETF usually holds a variety of bonds from different issuers, which lowers overall risk.

 

Sector

 

A sector ETF is industry-focused and invests in companies within one particular area, such as energy, healthcare, technology, or financials. There is some risk with a sector ETF because the sector’s performance affects returns. However, this type of ETF usually holds several companies within a sector, which can spread the risk.

Someone might choose to invest in a particular industry if they think it will perform well.

ESG & Sustainable ESG stands for Environmental, Social, and Governance, and invests in companies that meet certain environmental, ethical, and social standards. Investors often choose companies that align with their values and may be able to benefit from growing trends, such as renewable energy.

 

Index-tracking

 

Instead of picking individual stocks or bonds, these aim to replicate an index, such as the FTSE 100, S&P 500, or MSCI World. An index-tracking ETF doesn’t try to beat the market, but simply follows the index it tracks. Investors tend to pick this type of ETF because it’s cost-effective, simple, and useful for long-term investing.

 

Some UK and European ETF Differences to Make a Note of

 

• Currency considerations: UK ETFs commonly trade in GBP on the London Stock Exchange, whereas European ETFs generally trade in EUR on exchanges such as Euronext (France/Netherlands) and Xetra (Germany). The currency you trade the ETF in isn’t the same as the currency of the underlying investments, which may still be global.
• Taxation: Most European ETFs are Irish-domiciled, allowing them to benefit from a taxation treaty with the US. This typically results in lower withholding tax on US dividends (often 15% instead of 30%). In the long term, this can improve overall returns, making them a popular choice for UK investors.
• Platform access: Not all ETFs are available on every investment platform. Some European ETFs may not be offered by UK platforms, though many popular European ETFs remain listed on the London Stock Exchange and are easy to buy.

 

Risks to Watch Out For

 

Even though ETFs are considered a beginner-friendly investing option, it’s important to be aware of potential risks.

 

• Market risk: ETFs follow the market they invest in. Because of this, if the market falls, the ETF usually falls too. Even diversified ETFs can face big losses during crashes.
• Concentration risk: If an ETF focuses heavily on one sector or industry, it could lose value if that area performs poorly.
• Tracking error: An ETF is designed to replicate an index, but it may not track it perfectly due to factors like fees, timing differences, or fund structure.
• Currency risk: If an ETF invests in assets priced in a different currency, changes in exchange rates could potentially affect returns when converted back into your home currency.

 

Getting Started With ETFs Without Overcomplicating

 

Here are some steps to help you start.

 

1. Think about your risk tolerance and the goals you want to achieve. Focusing on long-term goals, like saving for retirement or growing your wealth, rather than short-term gains, opens the door to starting small.

2. Open a brokerage account or use a reliable and regulated platform where you can buy and sell ETFs easily.

3. Begin simple with manageable investments and low costs. You can add to these as you learn more. Remember, even the smallest investments can grow over time.

 

Explore our website to gain more investing tips and learn more about ETFs.

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