Diversifying your portfolio involves spreading your investments across a range of different assets. One way to do that is through ETFs.
An Exchange Traded Fund (ETF) is a type of fund that tracks an index or market such as the FTSE100 or S&P 500. ETFs are traded in the same way as individual stocks, which means they can be bought and sold on the stock market, through an investment service such as Smart Investor just like any other share. They can provide investors with diversification and access to a whole market or sector, combined with the benefits of a share, such as continuous pricing, flexibility and continuous dealing during market hours.
ETFs are usually passive investments, meaning they aren’t actively managed by a fund manager, who picks which assets to buy and sell. Instead, the ETF fund manager aims to keep the fund’s holdings in line with the particular index it is tracking. The share price is updated by the stock exchange throughout the day. As with any other type of investment, the value of ETFs can go up or down so you could get back less than you invest.
The majority of ETFs are offshore funds. This means they're domiciled (based) outside the UK. Make sure you understand the taxation rules that apply before you invest. Broadly if the fund you invest in has a ‘reporting status’ and you are subject to UK tax laws, gains will be subject to capital gains tax. If the fund does not have a ‘reporting status’, gains will be subject to income tax.
Remember that tax rules can change at any time in the future. Any favourable treatment currently available could later be altered or removed altogether. The effects of tax rules on you will depend on your individual circumstances.