STSM101060 - Introduction to Collective Investment Schemes: Exchange Traded Fund - Overview
Source: gov.uk (2025-11-05)


An Exchange Traded Fund (ETF) is a form of Collective Investment Scheme (CIS) and contains a pool of investments ('the scheme property') derived from the contributions of investors. The pool of investments is divided into equal portions called shares, and investors hold a number of shares depending on how much they have contributed.

The investors in the ETF are beneficially entitled to an undivided share of the investments subject to the ETF and are referred to as shareholders. The price of shares is determined by the Authorised Corporate Director of the ETF at the current market value of the investments held in the fund.

For the purposes of SI 2014/911 (the Stamp Duty and Stamp Duty Reserve Tax (Exchange Traded Funds) (Exemption) Regulations 2014) an ETF is defined in Regulation 5 as meaning a collective investment scheme which:
- A regulated market or
- A multilateral trading facility (MTF); and
- Is a UCITS
UCITS means:
- A UCITS within the meaning given by section 236A of the Financial Services and Markets Act 2000, or
- An undertaking established in Gibraltar which is a UCITS under the law of Gibraltar which implemented Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities.
Section 236A of FSMA defines (inter alia) a UCITS as being an undertaking established in the United Kingdom or an EEA State and so covers UK and EEA ETFs.

In broad terms, ETFs are typically index-based funds. This means they track (whether wholly or in part) a particular stock market index (for example, the FTSE 100 - a share index of the 100 most highly capitalised United Kingdom companies listed on the London Stock Exchange). The assets of a typical fund will therefore consist solely of shares in companies which are on the specific index.

The main difference between a traditional tracker fund OEIC and an ETF is that an ETF can be listed on a stock exchange and therefore its issued shares can also be traded on exchange in the same way as normal stocks and shares.

Another difference is pricing. OEIC shares will typically be priced once a day, whereas ETF shares are priced throughout market operating hours and will generally trade on the secondary market at a price that mirrors the performance of the underlying shares held by the fund and the market demand for that ETF. For example, if demand for an ETF increases a premium can develop, or if an ETF is being sold off it may trade at a discount. This transparent pricing potentially denies any opportunity by an investor to profit excessively by creating shares and selling those shares on the secondary market rather than surrendering them.

ETFs enable investors to gain a broad exposure to an entire stock market or trade sector, whilst enjoying low costs in surrendering and purchasing ETF shares and with the facility of settling and holding ETF shares in CREST.

Investors in an ETF (or any CIS) are not allowed to have day to day control over the management of the ETF fund property.

Investors will also not be able to purchase newly created ETF shares, or redeem existing ETF shares directly - they will need to use the services of an authorised participant (AP) who deals directly with the ETF for these transactions.

See STSM101050 (https://www.gov.uk/hmrc-internal-manuals/stamp-taxes-shares-manual/stsm101050) for the meaning of an OEIC

See STSM101010 (https://www.gov.uk/hmrc-internal-manuals/stamp-taxes-shares-manual/stsm101010) for the meaning of a Collective Investment Scheme.

See STSM103040 (https://www.gov.uk/hmrc-internal-manuals/stamp-taxes-shares-manual/stsm103040) on how shares in a Collective Investment Scheme are valued.

See STSM101065 (https://www.gov.uk/hmrc-internal-manuals/stamp-taxes-shares-manual/stsm101065) for the Stamp Duty and SDRT treatment of transfers involving ETFs.