The ETF industry is still relatively young; first introduced in the 1990s, ETFs (Exchange Traded Funds), also known as trackers, have been trading at record volumes in recent years. ETFs have a number of features that can make investment attractive for investors, even those with small amounts of capital to invest. So why should you invest in ETFs?
Definition of an ETF
Exchange Traded Funds trade just like stocks but are similar to index mutual funds. These funds mainly track an index, a commodity, or a pool of assets. That’s why they are also called trackers.
The amount of ETFs on the market is astronomic and the categories are considerable. Some ETFs aim to cover a particular sector, such as healthcare or technology, or a specific geographic area, such as the United States or Asia. The particularity of ETFs is that they are continuously quoted. In fact, they can be bought or sold at any time during the exchange’s opening hours. Since they are traded on the stock exchange, they can be bought and sold as easily as a stock !
Benefits of investing in ETFs:
- Diversification
A wide range of ETFs are available on the market and allow investors to easily and quickly create their own portfolio with exposure to thousands of underlying securities. - Transparency
The composition of an ETF portfolio is known precisely, day after day. - Low management fees
You don’t need to have a huge amount of money to invest in ETFs! A portfolio can be created with a few hundred dollars, pounds or euros. In addition, the annual management fee is quite low compared to the usual annual fee. With ETFs, you will only be charged 0.3% or 0.10% at most, annually. - Instant liquidity
As mentioned above, ETFs are listed on a continuous basis and liquidation is therefore instantaneous, i.e. you can sell your shares and get your money back or buy other shares.
How to choose your ETF ?
Currently, there are more than 2,000 ETFs listed on U.S. exchanges with combined assets exceeding $5.8 trillion. The first thing you need to do as an investor is to narrow down this enormous universe of ETFs and focus on just those that will suit your portfolio. In general, when selecting an ETF, an investor should carefully consider the benchmark, the ETF provider, the replication methodology, the fees, the dividend treatment, but also the tracking difference or tracking error, the capitalization or AUM and finally the liquidity. You can also delegate this choice to an ETF trading robot that will make the selection for you according to your risk profile.
Examples
The S&P 500
The S&P 500 is the leading index in the United States and is based on 500 large companies listed on the American stock exchanges. It includes famous technology stocks such as Google, Apple, Facebook and Amazon.
The RUSSEL 2000
The RUSSEL 2000 is the U.S. small-cap index. The 2,000 companies that make up the RUSSEL 2000 Index average $2 billion in value.
The CAC 40
The CAC 40 includes the 40 largest French companies. It includes financial companies such as BNP, Société Générale and Crédit Agricole, as well as luxury companies such as Hermès, L’Oréal, Kering and LVMH.
The DAX 30
The DAX 30 represents 30 of the largest and most liquid German companies listed on the Frankfurt Stock Exchange, Germany’s leading financial center.
The Dow Jones (DJIA)
The Dow Jones Industrial Average (DJIA), known as the Dow Jones, is the oldest stock market index in the world! It includes only 30 American companies.
The MSCI Emerging markets
This is the index of emerging countries, which in principle will be the developed economies of tomorrow. It includes 24 countries, mainly China, South Korea, Taiwan, Russia, India, Brazil and South Africa.