What Is an ETF? How Exchange-Traded Funds Work, and Are They a Good Investment?

If you've looked into investing beyond a savings account or a money market fund, you've probably come across ETFs. They're one of the fastest-growing investment products in the world, and Kenyans can now buy them on the Nairobi Securities Exchange or through global platforms in US dollars.

But the term raises plenty of questions. What exactly is an ETF? How does it make you money? Is it the same as an index fund? And are ETFs a safe investment, or just another way to lose money in the stock market?

This guide answers each of those questions in plain language. You'll learn how ETFs work, how they compare with index funds, mutual funds, and money market funds, what the real risks are, and how to start investing in ETFs from Kenya.

What is an ETF?

An ETF, or exchange-traded fund, is an investment fund that holds a basket of assets and trades on a stock exchange like a single share. The basket can hold shares, bonds, commodities such as gold, or a mix. When you buy one unit of an ETF, you own a small slice of everything inside it.

Here's a simple example. An ETF that tracks the S&P 500 holds shares in the 500 large US companies in that index. Instead of buying 500 separate stocks, you buy one ETF unit and get exposure to all of them.

How does an ETF work?

1. A fund manager creates the ETF and decides what it will hold, usually by following an index such as the S&P 500 or the MSCI World.

2. The fund buys the underlying assets and divides ownership into units.

3. The units are listed on a stock exchange, where investors buy and sell them during trading hours.

4. The price moves throughout the day with the value of the assets inside the fund.

5. Income is passed on. Depending on the fund, dividends or interest from the holdings are paid out to investors or reinvested.

That combination is what makes ETFs distinctive. You get the diversification of a fund with the flexibility of a share you can trade at any time the market is open.

How do ETFs make money for you?

ETFs can make money for you in two main ways:

• Price growth. If the assets inside the ETF rise in value, the price of each ETF unit rises too. You profit when you sell for more than you paid.

• Income. Many ETFs pass on dividends from the shares they hold, or interest from bonds. Some pay this out in cash; others reinvest it automatically so it compounds.

The reverse is also true. If the underlying assets fall, the ETF's price falls, and you can sell for less than you invested.

How does the ETF provider make money?

The company that runs the ETF charges an annual fee called the expense ratio. It's a small percentage of your investment, deducted from the fund's value over the year rather than billed to you separately. Broad index ETFs tend to have some of the lowest fees in investing. If you buy through a platform, the platform may also charge its own fees, so check both.

ETF vs index fund vs mutual fund: what's the difference?

These three terms overlap, which is why they're easy to confuse. The key is that they describe different things:

• Mutual fund describes a structure: a pooled fund you buy into directly from the fund manager. In Kenya, these are usually called unit trusts or collective investment schemes.

• Index fund describes a strategy: tracking a market index instead of trying to beat it.

• ETF describes a structure too: a fund whose units trade on a stock exchange.

So is an ETF an index fund? Often, yes. Most ETFs track an index, which makes them index funds that happen to trade on an exchange. But some ETFs are actively managed or follow a theme instead of an index. And an index fund can also be a mutual fund that you buy directly from the manager rather than on an exchange.

Are index funds and mutual funds the same? Not quite. An index fund can be structured as a mutual fund, but many mutual funds are actively managed, with a manager picking investments to try to beat the market.

For more on index investing, see our guide on how to invest in index funds in Kenya.

ETF vs money market fund

Money market funds and ETFs do different jobs. A money market fund is built to protect your capital and pay steady interest. An equity ETF is built for long-term growth, and its value goes up and down with the market.

Most investors use both. A money market fund holds cash you may need soon, while ETFs hold money you can leave invested through market ups and downs. Ndovu offers the Ndovu Fund, a money market fund in KES and USD, alongside global ETFs.

See it in numbers: Use the Ndovu Fund calculator to see how regular monthly savings could grow, then decide how much to keep in cash and how much to invest for the long term.

You may also see "money market ETFs" in other markets. These are ETFs that hold short-term debt, combining money market holdings with exchange trading.

Are ETFs safe?

ETFs are a regulated, widely used way to invest, but they are not risk-free. How safe an ETF is depends mostly on what it holds. A broad ETF spread across hundreds of companies is generally more stable than one focused on a single sector or theme, and a bond ETF usually moves less than an equity ETF.

The main risks to understand:

• Market risk. If the market falls, an ETF tracking it falls too. Diversification spreads risk across many companies, but it doesn't protect you from a broad market decline.

• Concentration risk. Sector and theme ETFs, such as technology or crypto-related funds, hold fewer, more similar companies. They can rise faster but also fall harder.

• Currency risk. Global ETFs are priced in US dollars. If the shilling strengthens against the dollar, your returns in shillings shrink, and the reverse is also true.

• Liquidity risk. Some ETFs trade rarely, which can make them harder to buy or sell at a fair price. This has been an issue on smaller exchanges.

Are ETFs stable?

Not in the short term. Equity ETFs can move several percent in a day. Over longer periods, diversified ETFs have tended to be steadier than individual stocks, because one company's bad news is offset by the rest. That's why ETFs suit money you can leave invested for several years.

So, are ETFs a good investment?

For many long-term investors, a diversified, low-cost ETF is a sensible core holding. Whether it suits you depends on your goals, timeline and how comfortable you are with your investment's value going down at times. Past performance doesn't guarantee future returns.

Still have questions? Ndovu runs free monthly live sessions on investing. Join one and ask your ETF questions before you put money in.

Why invest in ETFs?

ETFs have become one of the most popular investment products in the world. According to research firm ETFGI, global ETF assets passed US$24 trillion at the end of August 2026. Investors use them for a few clear reasons:

1. Instant diversification. One purchase can spread your money across dozens or thousands of companies.

2. Low costs. Index ETFs often charge lower annual fees than actively managed funds.

3. Flexibility. You can buy and sell during market hours at the current price.

4. Transparency. Most ETFs publish their holdings, so you can see exactly what you own.

5. Global access from Kenya. ETFs let Kenyan investors own a share of US, European and emerging-market companies without opening a foreign brokerage account. They also let you hold part of your savings in US dollars.

How to invest in ETFs from Kenya

Kenyan investors have two main routes into ETFs.

1. ETFs listed on the Nairobi Securities Exchange. The NSE currently lists two ETFs: the Absa NewGold ETF, which tracks the price of gold, and the Satrix MSCI World Feeder ETF, which listed in July 2025 and gives exposure to large companies across developed markets. You buy these in shillings through a licensed stockbroker and a CDS account. A third is on the way. In August 2026, the Capital Markets Authority approved the WSA Banking Index ETF, which tracks the NSE Banking Index and will be the first ETF domiciled in Kenya. It was expected to list in October 2026.

2. Global ETFs through a licensed platform. Platforms such as Ndovu let you invest in US-listed ETFs in dollars from your phone. Ndovu's ETF range includes broad index funds tracking the S&P 500, the MSCI World and emerging markets, as well as sector, bond and gold ETFs, from USD 50.

How to start: step by step

1. Set your goal and timeline. ETFs suit goals at least five years away.

2. Choose a platform or broker licensed by the Capital Markets Authority.

3. Open and verify your account. You'll need to complete the platform's identity checks.

4. Fund your account using the payment options your platform offers.

5. Choose your ETFs using the criteria in the next section.

6. Invest regularly and review occasionally. Small, consistent deposits often work better than one large purchase.

How to trade ETFs

ETFs trade like shares. You place a buy or sell order during market hours, and the trade goes through at the current market price. On the NSE, that happens through your stockbroker. On a platform such as Ndovu, you choose the fund and the amount in the app.

When to buy ETFs

Nobody can reliably predict the best day to buy. Many long-term investors use regular investing, also called shilling-cost averaging: putting in a fixed amount every month regardless of price. You buy more units when prices are low and fewer when they're high, and you avoid the stress of trying to time the market.

Ready to try it? Download the Ndovu app on Google Play or the App Store and browse the ETF range before you invest.

How to choose an ETF

There's no single best ETF for everyone. The right one depends on what you're investing for. Instead of chasing last year's top performer, compare ETFs on these points:

What about growth ETFs?

Growth ETFs focus on companies expected to grow faster than average, often in technology. They can deliver higher returns in strong markets but tend to swing more sharply. Many investors hold a broad index ETF as their core and add a smaller growth or sector position on top, sized to how much volatility they can handle.

Want a second opinion? If you're unsure which ETFs fit your goals, compare Ndovu's plans. The Standard plan includes a financial advice session, and the Ultimate plan adds a dedicated relationship manager and unlimited advice.

Start investing in ETFs with Ndovu

Ndovu is licensed by the Capital Markets Authority as a Fund Manager and Investment Adviser. Pick the next step that fits where you are:

• New to ETFs? Explore Ndovu's ETF range, from S&P 500 and MSCI World funds to gold and bonds, starting from USD 50.

• Investing a larger amount? The Kibaba Special Fund is a CMA-regulated fund with professionally managed global exposure in KES or USD, from KES 250,000 or USD 2,500. Leave your details on the page, and the team will get in touch.

• Prefer to talk it through? Contact the Ndovu team with your questions.

Disclosure:

Ndovu is a regulated Robo-advisory platform operated by Ndovu Wealth Limited (‘NWL’). NWL is a Fund Manager licensed by the Capital Markets Authority (Kenya).

The information provided on this platform and the products and services offered are intended solely for persons in regions and jurisdictions where such distribution and utilization are in accordance with local laws and regulations. Ndovu does not promote its services in regions where it lacks the necessary licenses; It is exclusively available to persons residing in countries where it holds a valid license or has regulated partners. Ndovu does not extend its services to citizens of the United States, Canada, Japan, and other restricted territories.

Disclaimer:

All ETF products are subject to risk, including country/regional, liquidity, and currency risks. Market prices of securities within the ETF may rise and fall, sometimes rapidly and unpredictably.

While ETFs provide diversification through exposure to a basket of securities, they do not eliminate the risk of loss. Diversification does not ensure a profit or protect against a loss. These are non-CIS products and are registered by the SEC.

Frequently asked questions

What is an ETF in simple terms? 

An ETF is a fund that holds a basket of investments, such as shares or bonds, and trades on a stock exchange like a single share. Buying one unit gives you a slice of everything the fund owns.

Is an ETF an index fund? 

Most ETFs are index funds because they track a market index. But some ETFs are actively managed, and some index funds are mutual funds you buy directly from the manager rather than on an exchange.

Are ETFs a safe investment? 

ETFs are regulated and diversified, but their value can fall. Broad index ETFs are generally more stable than sector or theme ETFs. They suit money you can leave invested for several years.

How do you make money on ETFs? 

Through price growth, when the ETF's value rises above what you paid, and through income, when the fund pays dividends or interest.

Is a money market fund better than an ETF? 

Neither is better; they do different jobs. A money market fund suits short-term savings and emergency cash. An equity ETF suits long-term growth.

How many ETFs are there globally? 

According to ETFGI, there were 17,713 ETFs worldwide at the end of August 2026, listed on 86 exchanges and offered by 1,044 providers.

Can I create my own ETF? 

Not as an individual investor. ETFs are created by fund managers and must be approved by a regulator. In Kenya, that's the Capital Markets Authority.

What is the minimum to invest in ETFs in Kenya? 

It depends on the route. On Ndovu, global ETFs start from USD 50. NSE-listed ETFs are bought through a stockbroker, whose minimums vary.