An exchange-traded fund (ETF) is an investment vehicle that trades on the stock market, just like individual stocks. It offers investors exposure to a diversified basket of assets, such as stocks, bonds, or commodities, all within a single security. ETFs are bought and sold on an exchange and track the performance of an underlying index.

An ETF combines the diversification of a portfolio with the flexibility of trading like a stock on an exchange throughout the day. In contrast, mutual funds are typically bought and sold only once a day through the fund manager, and their pricing is set at the end of the trading day. ETFs generally feature lower management fees and real-time pricing transparency compared to many mutual funds.

ETFs are generally grouped by asset class, investment strategy, and investment objective. By asset class, they can invest in equities, bonds, commodities, real estate, or even cryptocurrencies. By strategy, they may be actively managed or passively track an index. By objective, they are often designed to target growth opportunities or value-oriented companies.

ETFs offer compelling benefits, including instant access to a diversified range of markets through a single purchase. They provide enhanced flexibility and liquidity, as they trade on exchanges like stocks during market hours. Furthermore, ETFs are known for their regulatory oversight and transparency, offering comprehensive information about their investment strategies and holdings.

Like all investments, ETFs carry various risks. The primary risk is market risk, stemming from the performance of the underlying index. Other factors influencing an ETF's performance include currency risk, interest rate risk, credit risk, and concentration risk. For more details on the risks associated with any investment, please refer to the fund prospectus

The two primary structures for ETFs are physical and synthetic. Physical ETFs directly own the underlying securities within the index they track. Synthetic ETFs use derivatives to replicate index performance. For example, Lunate Equity ETFs typically invest in all the stocks that make up the tracked index (full replication), while Lunate Fixed Income ETFs may use a sampling strategy for efficiency.

ETF liquidity is not only determined by the trading volume of the fund on stock exchanges, but also, importantly, by the implied liquidity of its underlying securities. The 'creation and redemption' process further enhances this: Authorised participants (APs) and market makers are contracted by the ETF issuer to create or redeem ETF shares, ensuring the fund’s price remains closely aligned with the value of its underlying assets.

ETFs are traded directly on stock exchanges. Their pricing involves three key concepts:

• Net asset value (NAV), which is the official end-of-day valuation.
• Indicative net asset value (iNAV), a real-time estimated price displayed during trading hours.
• Market Price, the actual price at which the ETF is bought or sold on the exchange, influenced by supply and demand.

The easiest way is to see how closely the ETF’s returns match the index it is designed to follow. You should also consider whether it has delivered on its goal over time.

The total cost of owning an ETF encompasses both trading costs and holding costs Transaction costs include brokerage commission (if applicable) and while holding cost consists of a Total Expense Ratio (TER), this is an annual fee charged by the ETF manager to cover fund management, administration and operational costs. TER is expressed as a percentage of the fund’s assets and is automatically reflected in the ETFs performance.