Exchange Traded Funds (ETFs) are open-ended investment funds which are listed and traded on a stock exchange. Its concept is very similar to a unit trust or mutual fund where monies are pooled together and invested according to the ETF's investment objective. It is different from unit trusts as it is a passively managed fund with very low management fees.
ETFs are increasingly popular because:
They are well diversified
ETFs track bond or equity indices. These indices usually consist of a basket of securities. They give a broad representation of the market in which they track. Eg: S&P 500 UCITS tracks S&P 500, which represents 500 blue chip stocks in the US market. So if a few stocks plunge overall performance would not be badly affected.
They give access to wide range of markets, sectors and classes, which might not be easily accessible
ETFs make investments in these markets easy. For example, to gain access to the Thailand stock market, one would need to open a brokerage account and understand the language to know what stocks to buy. ETFs can track the Thai exchange and instantly give exposure to the entire Thai market.
They are low-cost
ETFs have generally lower fees and expense ratios as compared to mutual funds/unit trusts.
They track the index closely
ETFs track the index as close as possible, therefore if the index is up 10%, the ETFs would be up 9.8% (assuming an expense ratio of 0.2%).