Exchange Traded Funds, ETF for short, or trackers, are exchange-traded funds. ETFs first appeared in during the 1990’s, they then became increasingly popular in the 2000’s and are widely used by investors over the world.
ETFs are investments that track the performance of a stock market index as closely as possible, both up and down. It is a replication of a stock market index. Unlike other funds, ETFs are continuously traded, which means they can be bought or sold at any time during the day when the stock market is open.
A very large number of ETFs are available on the market and offer the possibility of investing in a geographical area (Europe, United States, Asia, etc.) or in a specific economic sector (real estate, health, commodities, new technologies, banks, etc.).
ETFs are traded on the stock market, like a share, and like shares, you place your order with your financial intermediary and you control the price of the order.
Risks and benefits
ETFs have minimal management fees; there are no front-end load and the transaction costs are getting lower and lower since the advent of online brokers. As mentioned above, ETFs are listed on a daily basis, so you can buy and sell them at any time. In addition, trackers offer you a very wide choice of investment opportunities. They allow you to invest in French or foreign markets or in a particular sector of activity. ETFs are perfectly suited to the needs of an investor who does not want to put all his eggs in one basket.
Although its diversity and simplicity are undeniable advantages, ETFs do carry some risks.
The main risk of trackers is the variation of the index they follow: if the index falls, your portfolio will fall too (even more if you have chosen leveraged ETFs). Another risk is the tracking error, when the evolution of the ETF moves away from the index. In the same way, an ETF that is not well known and has few buyers and sellers may have difficulty tracking “narrow” markets. Finally, as an ETF is a fund, it can fail. Indeed, if the liquidity is insufficient to pay back the investors’ withdrawal, the fund will be declared bankrupt, whereas the index cannot go bankrupt.
Which ETF to choose?
First and foremost, it is important to have a clear idea of how to build your financial portfolio. The list of ETFs is extremely long, so make sure you select only those ETFs that invest in the asset class you want.
Next, choose the underlying asset of your ETF carefully. If you don’t have a preference for a geographic or economic sector, you can opt for a tracker that tracks the overall performance of the global economy. The MSCI World ETF is the most popular index for tracking global market performance.
Or, if you have time to think about it, you can define which geographic and/or economic sector you want to invest in. You can also invest via robo-advisors ETF.
Once you have chosen the underlying, you must choose the issuer. The issuer is the fund management company that creates, sells and markets an ETF. The best choice is to choose an ETF with the largest capitalizations to avoid risk.
The ETF ESG
You can choose to invest in socially responsible investment funds. These SRI-labeled ETFs respect ESG criteria: Environmental, Social and Governance. They measure the environmental, social and governance impact of the company. ESG ETFs allow you to make an ecological and socially responsible investment.