October 18, 2026

All About ETFs! A Super Easy Explanation of How They Work!

“I’ve started NISA, but are there other investment options besides mutual funds?”

For those who have started to have such questions, this time, as a next investment method after popular NISA mutual funds like All Country or S&P 500, I will explain ETFs (Exchange Traded Funds) in a super easy-to-understand way!

Once again, what is NISA in the first place?

I have explained it several times in previous articles, but let’s review it again.

NISA is a system where profits earned from investments become tax-free.

Normally, capital gains and dividends earned from stocks or mutual funds are subject to a tax of approximately 20.315% in principle.

However, if you invest in eligible products through a NISA account, your profits will not be taxed under certain conditions.

The new NISA mainly has two investment quotas.

Tsumitate Investment Quota: Covers mutual funds suitable for long-term, installment, and diversified investment
Growth Investment Quota: Covers a wider range of products, including mutual funds, domestic and foreign stocks, and ETFs

The Tsumitate Investment Quota has an annual limit of 1.2 million yen.

The Growth Investment Quota has an annual limit of 2.4 million yen.

The total is 3.6 million yen, and the lifetime tax-free holding limit is 18 million yen.

NISA is strictly a tax incentive system and is not a system that prevents investment losses.

The Popular Choices for Beginners: “All Country” and “S&P 500”

When starting to invest with NISA, “All Country” and “S&P 500” are often the first candidates that come up.

What is All Country?

All Country is an abbreviation for “All Country World Equity,” and a representative product is “eMAXIS Slim Worldwide Equity (All Country).”

Because it allows for broad investment in stocks across countries around the world, its feature is that you can diversify across countries and regions with just one fund.

What is the S&P 500?

The S&P 500 is a stock market index composed of approximately 500 representative large-cap companies in the United States.

A representative investment trust is “eMAXIS Slim US Equity (S&P 500).”

While you can invest in major US companies all at once, you need to be aware that your investments are concentrated in the US market.

The Next Step: What is an “ETF”?

Once you get used to investment trusts, you should also learn about ETFs.

ETF stands for “Exchange Traded Fund”, which refers to an investment trust listed on a stock exchange.

Most of these products allow you to diversify your investment across multiple stocks and other assets by purchasing a single product, just like a regular mutual fund.

For example, with an ETF that tracks the S&P 500, you can invest in major U.S. companies all at once.

Differences between regular mutual funds and ETFs

Regular mutual funds

Traded at a net asset value calculated once per day
Can be purchased by specifying a dollar amount
Easy to set up monthly automatic investments
If distributions or dividends are paid, they can be automatically reinvested

ETFs

Traded on an exchange just like stocks
Prices fluctuate while the market is open
Depending on the brokerage, you can place orders by specifying the number of shares and trade in real-time
If distributions or dividends are paid, they are not automatically reinvested but are deposited into your brokerage account

Both are types of mutual funds, but their trading mechanisms differ.

With regular mutual funds, regardless of the daily fluctuating net asset value,

you can specify your own purchase amount, such as 5,000 yen, 10,000 yen, or 20,000 yen.

Instead, the number of units is determined by the purchase amount and the net asset value at the time of purchase.

Investment trusts are not traded in shares, but in units called kuchi.

In contrast, ETFs are traded on stock exchanges just like individual stocks.

Unlike regular investment trusts, you buy a certain number of shares at a specific price per share, so

you cannot decide the purchase amount yourself; the price is determined by the price per share multiplied by the number of shares purchased.

ETFs are not traded in units, but in units of 1 share, 2 shares, etc..

ETFs are ordered at a stock exchange.

Even though it is called a stock exchange, you do not have to go anywhere in person. You can trade within the securities account where you opened your NISA account.

Stock exchanges have trading hours, and

in the case of the Tokyo Stock Exchange, trading starts at 9:00 AM, breaks between 11:30 AM and 12:30 PM, and ends at 3:30 PM.

By the way, the morning trading session is called ‘zenba’ and the afternoon trading session is called ‘goba’.

Also, during trading hours when ETFs are traded in real-time and prices fluctuate,

limit orders and market orders are the two methods used for trading.

・Limit order

This is a method of placing an order by specifying a price, such as wanting to buy if the price drops to this level or sell if it rises to this level.

However, the order will not be executed if the specified price is not reached within the time frame.

・Market order

This is a method of placing an order without specifying a price when you want to execute a trade immediately.

However, due to sudden price movements, the order may be executed at a price significantly higher or lower than the currently displayed price.

And, when a buy or sell order is confirmed via a limit or market order, this is called execution.

Benefits and points to note about ETFs

ETFs have the following characteristics.

Benefits

You may be able to choose low-cost products
You can trade while watching market prices
Some products allow limit orders just like stocks

Points to note

Costs such as spreads and commissions may be incurred when trading
Market prices may deviate from the net asset value
Depending on the product, distributions may be paid, which can make reinvestment cumbersome

For investment trusts, the base price is updated once a day at the time the date changes.

With ETFs, you can trade at your target price during trading hours, such as buying when the price drops to a certain level or selling when it rises to a certain level.

Of course, it is also possible to purchase an ETF and hold it for long-term investment.

Also, just because it is an ETF does not mean it will necessarily have lower costs or higher returns than a regular investment trust.

Before purchasing, be sure to check not only the trust fees but also the trading costs and the investment targets.

Can I buy ETFs with NISA?

Yes. You can purchase eligible ETFs within the Growth Investment Quota.

However, not all ETFs can be purchased through NISA. Please check the product information provided by your brokerage firm to see if a product is eligible and available for purchase.

Additionally, there are domestic-listed ETFs and overseas-listed ETFs, and they differ in terms of trading currency and tax treatment.

For beginners, it is a good approach to first understand the mechanism of installment investment through investment trusts, and then compare ETFs once you get used to it.

You may find the written explanation difficult, but as the saying goes, ‘seeing is believing,’ and you might find that once you actually try an ETF, it is surprisingly simple.

However, there is no need to force yourself to try it. I think it is fine to prioritize investment trusts first, and if you find an investment target that interests you, you can look into and purchase an ETF.

Summary: Choose the investment method that suits you

Let’s summarize the key points.

NISA: A system where profits earned from investments are tax-free
All Country (Orkan): An investment trust that invests broadly in stocks from countries around the world
S&P 500: An investment trust that invests primarily in major U.S. companies

There are various investment trusts, including All Country and the S&P 500, among standard investment trusts.

The same applies to ETFs, but if you get used to NISA and find an investment destination you are interested in, it might be a good idea to compare and research the differences between investment trusts and ETFs.

However, what is important in investing is not buying one complex product after another.

First, understand how they work, and aim for long-term asset formation with an amount you can comfortably afford.

Investment trusts and ETFs each have their own characteristics. Choosing according to your investment goals and ease of management is the first step to continuing your investment for a long time.