What is an ETF and how does it work?

The full name is Exchange Traded Fund. Each of those words tells you something about how an ETF works.

In plain English, it is:

a fund that is traded on a stock exchange.

That is already a useful definition. But first, it helps to understand what a stock exchange actually does.

A stock exchange is an organised marketplace for financial products, including shares and ETFs.

A share represents part ownership of a company. When a company issues shares to the public, it can use them to raise capital.

If you later buy an existing share on the stock exchange, your money will not normally go straight to that company. You are buying the share from another investor on the secondary market.

The stock exchange therefore mainly helps buyers and sellers find each other. ETFs are traded there too.

A small Belgian fact

The Dutch word beurs, meaning stock exchange, is often linked to the Van der Beurze family in Bruges. In medieval Bruges, international merchants gathered around the family’s premises, and their name eventually became associated with what we now call the stock exchange.

A fund brings different investments together. Imagine a fund that owns shares in Nvidia, Apple, Microsoft, Toyota, Nestlé and hundreds of other companies.

When you buy a share of that fund, you do not need to buy every company separately. You buy one product and gain indirect exposure to the investments held inside it.

This helps explain why ETFs are often used for diversification. If your entire investment is in one company, you depend heavily on what happens to that one business. A fund holding hundreds of companies spreads that company-specific risk more widely.

It does not mean the fund can no longer fall in value. If global stock markets decline, even a very broadly diversified equity ETF can fall sharply.

This is a common source of confusion.

Take the MSCI World Index. It is not an ETF that you can buy directly. It is an index: a way to measure the performance of a particular part of the stock market. MSCI is a global index provider that creates and maintains indexes like this one.

The MSCI World Index contains large and mid-sized companies from 23 developed countries. At the end of July 2026, it contained 1,282 companies.

An ETF can then try to track that index as closely as possible.

The distinction matters. The index determines which part of the market the ETF aims to track. The ETF is the financial product through which you can invest in it.

Many well-known ETFs passively track an index, but an ETF does not have to be passive. Actively managed ETFs also exist, with a manager deciding which investments belong in the fund.

ETFs can hold very different things. The label ETF alone therefore tells you little about an investment’s risk or diversification.

What can it hold?

What can an ETF focus on?

An ETF holding hundreds of companies across countries and sectors is very different from one that invests only in twenty technology companies. Both are ETFs, but their diversification and risk can be very different. One ETF can therefore be both an equity ETF and a world ETF.

Rootree often uses broadly diversified equity ETFs as examples. That is not because one particular ETF is right for everyone, but because they can combine many companies, sectors and countries in one product.

Many large index-tracking ETFs also have relatively low management costs. They clearly show how diversification, simplicity and costs can fit together.

A world equity ETF is still an equity investment. Its value can fluctuate significantly and fall sharply during severe market declines. Our article on why market downturns are normal explains those fluctuations in more detail.

Even the word world deserves a closer look.

The name MSCI World sounds as if it includes every stock market in the world. It does not.

The index contains large and mid-sized companies from 23 developed countries. Emerging markets are not included. Neither are small-cap companies. Within each included country, the index covers about 85% of the free-float-adjusted market capitalisation.

Countries are not represented equally either. On 31 July 2026, US companies represented about 72% of the MSCI World Index. This is not a fixed country allocation: companies are mainly weighted by market value. Because many of the largest listed companies are American, the United States automatically receives a large weight.

When companies make a profit, they may pay part of it to shareholders as a dividend. An equity ETF can therefore receive dividends from the companies in which the fund invests.

What happens to that money depends on the type of ETF.

A distributing ETF periodically pays the income it receives to the investor. An accumulating ETF keeps that income inside the fund and automatically reinvests it.

The distinction may sound technical, but it can matter over time. Our article on compound growth explains why reinvested growth can continue to build on itself.

Belgian tax rules are time-sensitive, and the precise treatment can depend on the fund and your circumstances.

For two otherwise comparable equity ETFs, the accumulating version can be more tax-efficient in Belgium than the distributing version. A distributing ETF pays its dividend to you. Most dividends are taxed at 30% in Belgium, and the ordinary dividend exemption does not apply to dividends from collective investment institutions. An accumulating ETF does not pay that income out to you, but reinvests it inside the fund.

Since 2026, however, the comparison has become less straightforward. Belgium also generally taxes realised gains when financial assets are sold at a profit. This is also relevant to an index-tracking ETF. You therefore cannot conclude that an accumulating ETF is more tax-efficient in every situation.

Other tax rules may also be relevant for bond ETFs and some mixed ETFs.

This is general education, not personal tax advice. Check the current rules when making a decision.

TER stands for Total Expense Ratio. In simple terms, it is a percentage indicating the fund’s annual ongoing charges.

As a simple illustration, 0.20% of €10,000 is about €20.

You do not receive a separate bill. The charges are processed inside the fund and slightly reduce its return. A lower TER therefore means that less of the fund’s assets goes towards ongoing charges.

One figure is not the full story. The TER is not necessarily your total cost of investing in an ETF. Broker fees and the difference between the buying and selling price can also matter when you trade.

Belgian investors may also pay tax on stock exchange transactions, known as TOB. The Belgian tax authority currently lists rates of 0.12%, 0.35% and 1.32%. The applicable rate depends on the tax classification of the transaction and the product.

Costs matter, but look beyond the TER alone. Our article on how fees affect your returns shows why small percentages can make a meaningful difference over time.

Let us use one real product as an example.

IWDA is one of the tickers under which the iShares Core MSCI World UCITS ETF is traded. It is included only to show how to read information about an ETF, not as a personal recommendation.

According to BlackRock, the accumulating version with ISIN IE00B4L5Y983 had the following characteristics on 7 August 2026:

The fund aims to track the MSCI World Index. It therefore gives you indirect exposure to many companies across developed countries. At that time, Nvidia, Apple and Microsoft were among the index’s largest holdings.

The exact composition and weights can change over time.

One ETF can have several names and codes. In this example:

• iShares Core MSCI World UCITS ETF is the official product name;
• MSCI World is the index the fund aims to track;
• IE00B4L5Y983 is the ISIN, a unique international identifier for this version;
• IWDA is a ticker used for that version on certain stock exchanges.

A ticker is closer to a stock exchange abbreviation than the fund’s unique identity. This helps when you try to find an ETF through a broker.

ETFs are bought and sold through a broker. A broker is the intermediary that gives you access to the stock exchange and carries out your orders.

Through a brokerage account, you can find an ETF and place a buy order.

Broker choice, costs and buy orders each deserve a separate explanation.

The popularity of ETFs can make the word ETF sound almost like a synonym for a good investment. It is not.

An ETF can be broad or narrowly focused, inexpensive or costly, and invest in shares, bonds or a very specific niche.

A global equity ETF can fall sharply during a severe market crash. A sector ETF may depend heavily on one industry. A bond ETF has different risks from an equity ETF. A low TER only tells you something about costs. It does not tell you how broadly the ETF is diversified or how much risk it carries.

The wrapper does not tell you enough. You need to know what is inside.

ETF stands for Exchange Traded Fund: a fund that can be bought and sold on a stock exchange.

A fund can bring many different investments together, allowing one purchase to give you indirect exposure to many companies or bonds. But not every ETF does the same thing.

To understand an ETF, look at what the fund holds, which index it may track, how broadly it is diversified, what it costs, how it handles income and which risks come with it. The abbreviations can come later.