ETF definition and investment

ETFs: definition and investment

ETFs are one of the easiest ways to invest in the stock market. That’s why they’re so popular with experienced investors and newbies alike. In 2021, the net inflow of these financial products in Europe increased to 162 billion euros while it has already reached a record level (117 billion euros) in 2020.

Focus on ETFs.

C’What is an ETF ?

An ETF (Exchange Traded Fund) refers to a publicly traded investment fund that replicates the movements of an index such as the CAC 40, Nasdaq, Euro Stock 50, etc. It is also called tracker. Unlike traditional investment funds such as SICAVs and FCPs, ETFs do not aim to outperform the market.

The objective of an ETF is to replicate the performance of a specific stock market index in order to offer the same return as the one generated by the latter. In concrete terms, if the index rises, the ETF will also rise. On the other hand, if its performance falls, the tracker follows an identical trend.

This financial instrument is managed passively.

Thanks to an ETF, it is possible toinvest in hundreds of companies simultaneously. There are different types of trackers:

  • Accumulation ETFs, where dividends are reinvested in shares of the same fund;
  • Distribution ETFs, which allow fund investors to receive dividends every three months or every year;
  • Bond ETFs, which invest in government and corporate bonds;
  • Sector ETFs, which replicate the benchmark index of a particular sector (automotive industry, real estate, etc.).) ;
  • Geographic ETFs, which replicate a country, a region or the whole world, are a good way to invest in a fund.

Do not hesitate to learn more about trackers before integrating these financial products in your investment portfolio.

What is the’interest of ETFs ?

There are several reasons to Investing in ETFs. First of all, these funds allow you to invest in a stock market index, which is usually made up of the largest companies in a given industry or country. Therefore, you will not waste time selecting one by one companies to invest your money in.

You’ll just have to choose the ETFs that best meet your objectives. Since these index funds are continuously quoted, you can also buy and sell them at any time.

Diversification is another major advantage of investing in trackers. This is because the risk is spread over a large number of securities. This will protect you from a possible bad performance of a specific company and will allow you to optimize the risk/return ratio.

Furthermore, ETFs have the advantage ofinvolve lower fees compared to traditional investment funds. In concrete terms, the management fees for trackers are around 0.20% per year. By way of comparison, they average 2% per year for mutual funds, SICAVs or FCPs. In addition, ETFs are not subject to the financial transaction tax of 0.30%.

In addition, investing in the stock market via trackers will allow you to benefit from various tax advantages. It is important to note that these financial products can all be held in an ordinary securities account. Some of them are also eligible for PEA, PEA-PME and some life insurance contracts.

What are the advantages of ETFs?

Investing in ETFs: what are the risks ?

In spite of these advantages, the tracker is a very expensive investmentinvesting in ETFs involve risks. Loss of capital is one of them. Indeed, the volatility of the tracked market exposes you to a risk of loss, because if the benchmark falls, your portfolio will suffer proportional consequences. The risk will be even higher if you opt for leveraged trackers.

This is why it is recommended to invest only what you are willing to lose.

For ETFs listed in foreign currency, there is also the risk of currency. In other words, it is necessary to take into account the variation of currencies, in addition to that of the index itself.

On the other hand, it is possible to face the liquidity risk for some trackers due to the lack of buyers. This situation generally occurs for index funds that are not well known.

Finally, it happens that theevolution of an ETF deviates from the benchmark. Called tracking error, this phenomenon causes an investment to lose value. Note that the more values an index contains, the more difficult it will be to replicate.