Ten years ago ETFs practically didn't exist. Now, they're an increasing popular - and practical - product for retail investors.

ETFs are instruments which track an investment - whether that's an index, commodity, or currency.  They are traded like shares, and like listed shares, can be held in an ISA or SIPP. Because they are not actively managed, you're not at risk of a fund manager making an unsuccessful market call, like Neil Woodford's recent switch out of BP and Royal Dutch Shell B.  into Glaxosmithkline and Astrazeneca (Of course, if he gets it right, you don't get the upside, either.)

 They also have lower costs than actively managed funds. For instance an iShares corporate bond ETF is available with a Total Expenses Ratio (TER) of 0.20 % a year [1] . That compares to traditional funds with typical charges of 1 to 1.5% - even on some passive tracker funds.

 And by the way, ETFs are a perfectly viable option for income investors. Unlike options, another way to trade indices, ETFs pay out a dividend based on the dividends paid by their index constituents. For instance IDVY (iShares DJ Euro STOXX Select Dividend) pays a distribution yield of 3.51% - not market-beating, but quite interesting compared to bank interest rates. 

 So far, so simple. You could just buy a FTSE 100 ETF, or a FTSE All Share ETF, and you've got your market exposure. In theory, a passive investor could create a pension portfolio entirely out of a selection of equity index ETFs and a couple of fixed income ETFs, and that would offer diversification - though it would never beat the market.

 There's a vast choice of ETFs available to the UK investor. When ETFs began, they focused on equity indices. However, new product areas have been added to the basket over time; commodity ETFs have been a particularly fast growth sector recently. Some commodites stocks are geared, meaning you get double the underlying performance of the commodity - definitely one for the risk taker, but don't put your whole portfolio in them! There are also fixed income ETFs, currency ETFs, and sector or theme based ETFs such as the iShares FTSE/Macquarie Global Infrastructure 100 ETF (INFR), which offers international exposure to transport and utilities stocks. There are even short ETFs which allow you to place…

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