Glossary
What is an ETF?
Updated Reviewed quarterly
An ETF (Exchange Traded Fund) is a basket of investments — shares, bonds, gold, property — that trades on a stock exchange like a single share. Buy one unit and you own a slice of the entire basket. ETFs typically charge much lower fees than actively managed funds and are easy to buy through any retail brokerage.
For New Zealand investors, ETFs solve three problems at once: low fees (typically 0.05–0.55% per year), instant diversification (one trade gets you 50–500+ companies), and tax clarity when you choose NZ-domiciled PIE funds. Smartshares and Kernel run NZX-listed ETFs; Hatch, Stake, Sharesies and Interactive Brokers give access to US-listed ETFs like SPY, VOO and QQQ.
How an ETF actually works
An ETF issuer (Smartshares, Kernel, Vanguard, BlackRock) creates a fund that holds an underlying basket of assets — usually the constituents of an index like the S&P/NZX 50 or the S&P 500. The issuer then lists units of the fund on a stock exchange (the NZX for FNZ or NZ20; the NYSE for VOO or SCHD).
When you buy a unit, you’re buying a slice of the entire basket — proportional ownership of every company the fund holds. The market price tracks the underlying basket throughout the trading day (this is what “continuous pricing” means). Authorised participants arbitrage any meaningful gap between the unit price and the basket’s net asset value, which keeps tracking error tight.
Distributions (dividends or interest from the underlying holdings) flow to ETF unit-holders either quarterly, semi-annually or annually depending on the fund. Capital appreciation comes from the underlying basket rising in value.
ETF vs index fund — what’s the difference?
An ETF and an index fund can track the exact same index. The structural differences sit in how you transact and how the unit price is set.
| ETF | Unlisted index fund | |
|---|---|---|
| Listed? | Yes — trades on an exchange (NZX, ASX, NYSE) | No — transacted direct with the fund manager |
| Pricing | Continuous (live market price) | Single end-of-day NAV |
| How you buy | Through a broker (Sharesies, Hatch, IBKR, Jarden, etc.) | Direct with the manager or via InvestNow / Simplicity |
| Fees | TER + brokerage + (sometimes) FX | TER only (no per-trade brokerage) |
| Fractional? | Yes via fractional-share brokers (Sharesies, Hatch) | Yes — you can invest any NZD amount |
| NZ tax wrapper | PIE if NZX-listed; FIF if US-listed (above NZ$50K) | Usually PIE (Kernel, Simplicity, Smartshares) |
| NZ examples | FNZ, NZ20, USF, KGM (NZX); VOO, SCHD (US) | Kernel S&P 500 direct, Simplicity Growth, AMP Capital |
For most NZ investors the practical difference is small — both can track the same index, both are PIE-taxed when NZ-domiciled, and fees are now broadly comparable. ETFs win on transparency (live pricing, listed holdings) and the option to set limit orders. Unlisted index funds win on simplicity (no brokerage, set-and-forget regular investing) and on being able to invest any NZD amount without thinking about ticker codes.
ETF vs managed fund — what’s the difference?
A managed fund employs a portfolio manager who actively chooses holdings, attempting to beat a benchmark. An ETF (when it’s an index ETF) just owns the benchmark. That difference shows up most clearly in two places:
- Fees. Actively-managed NZ funds typically charge 0.80–1.50% per year. Index ETFs charge 0.05–0.55%. Over 30 years on a $100K portfolio earning 7%, a 1.0% fee gap compounds to roughly $200K of foregone wealth.
- Performance vs benchmark. Industry-wide, the majority of active managers underperform their benchmark net of fees over 10+ year windows. The S&P SPIVA scorecard tracks this annually and the result is consistent.
Active management still has a role — especially in less-efficient markets, in fixed income, and in private assets where indexing isn’t practical — but for core equity exposure, index ETFs and index funds have largely become the default choice for cost-conscious NZ investors.
ETF vs an individual stock
A stock is one company. An ETF is a basket of (usually) tens or hundreds. The single biggest practical consequence is diversification: when one company in an index ETF has a bad year, the other 49 or 499 absorb the impact. With a single stock, your portfolio is fully exposed to that one outcome.
ETFs still carry market risk — they’re 100% subject to the market they track. An S&P 500 ETF falls in a US recession; an NZ50 ETF falls when NZ shares fall. What diversification does remove is single-company risk (the risk that one of your holdings goes to zero).
Where you’ll see this term
