In Europe, ETFs represent more than 1,000 billion euros in assets under management. Trackers, these new funds that replicate stock market indices, are gaining ground. They are simple and easy to understand products, ideal for taking advantage of instruments listed on the stock exchange. BNP Paribas Easy Low Carbon 100 Europe, Amundi MSCI World or Lyxor PEA Emergents are names of ETFs composed of large companies. If you want to invest intelligently in the stock market, you need to be aware of ETFs and their potential.
To understand ETFs, you need to master some definitions.
- Stock market index : a group of shares used as an indicator to measure the performance and evolution of a sector, a stock market, or an economy. It is equivalent to the average of the value of the securities in the group. The CAC 40, the Gold or the Health are stock market indices.
- Financial security: a property right held in the form of a share (part of the capital of a company or state) or a bond (part of the debt of a company or state). Acquiring a financial security allows one to obtain interest and/or dividends paid by the issuer.
- Underlying: Index reproduced by the Tracker. For example, the underlying of Lyxor Euro Corporate Bond Ucits ETF is Markit iBoxx euro Liquid Corporate Overall Index. The underlying of LYXOR ETF CAC40 is the CAC40.
They are called ETFs (Exchange-Traded Funds) or index funds. There are more than 750 ETFs listed on Euronext. What is it exactly? It is a simple and efficient way to invest in the stock market. It is an instant and simultaneous investment in thousands of companies and government bonds. So when you invest in an ETF, you get up to millions of geographically and sectorally diversified securities, automatically replicating the price of a benchmark index such as the CAC40 or the DAX. These securities can be stocks, bonds, oil, etc. Mutual funds are valued at the end of the trading session, while ETFs are quoted continuously.
The advantages of ETFs
- Simplicity. ETFs follow the price variations of stock market indices and are therefore simpler to analyse than the price of the shares that make them up.
There is also a simplification of reading the market. Unlike hedge funds, issuers must publicly disclose their history and daily performance.
- Diversification. When investing, one seeks to diversify one’s portfolio for safety, as placing one’s money in a single potentially volatile stock can result in massive losses due to economic hazards. One example is the energy sector which this year, due to the Covid-19 epidemic, has seen its shares fall drastically. ETFs themselves are very diversified, they can follow indices of stock markets, country shares, sectors of activity, commodities, strategy, etc.
- Liquidite. Unlike UCITS, ETFs are listed continuously on the Paris stock exchange from 9am to 5.30pm. You can thus follow them and interact with them in real time.
- Couts reduits. The costs of issuing and cancelling shares, i.e. the transaction fees and related administrative costs, are paid by the authorised participant and then by the new entrant. The absence of active management greatly reduces the total fees on assets (TFE). Unnecessary intermediaries are eliminated. There are no front-end fees or back-end fees.
Buying an ETF is cheaper than buying all the shares of the underlying.
Trackers are bought and sold in the same way as shares: Monday to Friday from 9am to 5.30pm. You can either go through a broker or your bank, or directly through an investment platform. Remember to check the amount of transaction fees charged by your intermediary.
ETFs are held in a tax wrapper , i.e. in an ordinary securities account (CTO), a Plan epargne actions (PEA) if they are eligible, or in a life insurance. To be held in a PEA, the ETF must be composed of securities of companies whose registered office is in the EU.
You will need to choose carefully the ETFs in which you invest. There are standard ETFs, short ETFs that reverse the daily performance of the index, and leveraged leveraged ETFs that multiply the daily performance of the index. Note also that ETFs are more suitable for long-term investments.