Introduction

Equity ETFs invest in baskets of stocks and are the oldest and most common type of exchange-traded fund.

They can be categorised by region, country, market capitalisation, dividend or sector.

The number of stocks held by an ETF ranges from 15 to over 6,000, and while single stock exchange-traded products (ETPs) are available, they are much less commonplace.

Weighting methodology

The most popular equity ETFs offer exposure to broad market-cap-weighted benchmarks such as the S&P 500, FTSE 100 or MSCI World.

Market-cap-weighted ETFs categorise the stocks that make up the index through the value of the company. Examples include Europe’s largest ETF, the iShares Core S&P 500 UCITS ETF (CSPX), or the SPDR Russell 2000 U.S. Small Cap UCITS ETF which tracks a basket of small-cap stocks (R2US).

Equity ETFs can also be equal-weighted, which gives the same weight to every stock in the index, or price-weighted, which is weighted by a company’s share price. Examples of price-weighted indices include the TOPIX or the Dow Jones Industrial Average.

Different types of equity ETFs

Regional or country ETFs allow exposure to a broadly diversified yet targeted specific economic bloc including Brazil, Europe, Asia-Pacific, China or Latin America.

Sector ETFs allow investors to invest in a basket of stocks that align with a particular industry or sector such as energy, materials, healthcare and financials.

Thematic ETFs, which are also made up of equities, focus on the megatrends of tomorrow in areas including clean water, cybersecurity or AI.

Finally, dividend ETFs invest in a basket of dividend-paying stocks. When these companies earn a profit, they can pay a proportion to shareholders as a reward, which is normally paid out on a pre-defined schedule.

Equity ETFs offer a straightforward path to diversification, reducing the risk associated with investing in individual stocks.

For instance, by investing in an S&P 500 ETF, an investor buys a stake in all 500 companies within the index, spreading risk across a broad spectrum of industries within the US economy.