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#INVESTMENTS — 04.07.2023

Understanding ETF

A few key elements before investing in ETF.

Adrien SAMUEL-LAJEUNESSE, Product Specialist

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What is an ETF?

An ETF (Exchange Traded Fund) is a listed investment product that aims to track the performance of a specific underlying index, hence the associated term of passive management.

Like traditional funds, ETFs contain assets with similar characteristics (equities, bonds, etc.), allowing investors to buy hundreds or even thousands of assets in a single transaction with reduced management fees compared to an active investment fund.

ETFs offer the choice of investing in a given geographical area (world, emerging...), a specific sector (healthcare...), innovative themes (IA...) or particular management styles (value...)

ETFs are popular with investors and are traded on the stock exchange throughout the day as common stock, making them liquid and easy to buy or sell.

 

How does an ETF work?

ETFs can be classified into two main categories depending on their replication method.

  1. Physical replication: ETFs actually hold the underlying assets of the index they seek to track. An ETF on the S&P 500 will hold the 500 stocks in the index with the same weighting.
  2. Synthetic replication: ETFs do not directly buy the underlying assets but use financial derivative instruments, such as swaps. This makes it possible to track the index without having to buy all the individual assets (receiving the index performance in return for a periodic payment).

Physical replication can be used when the index has a limited number of components with good liquidity.

Synthetic replication is particularly relevant for indices that are most sensitive to replicating because of, for example, the number of components or the difficulty of accessing some markets.

 

Which ETF to choose?

Here are a few key points to consider when choosing an ETF:

  1. Investment objective: In which asset class do you want to invest? Do you want a broad exposure to a specific market or to a particular sector or theme?
  2. Benchmark: Make sure it corresponds to your investment strategy and market view.
  3. Replication Method: Understanding the characteristics and associated risks makes it possible to choose the one that suits you best.
  4. Replication Quality: It is measured by Tracking Error and Tracking Difference. Management fees also have an impact on your long term return. Compare similar ETFs to find the one that offers a good balance between return and cost.
  5. Liquidity and trading volumes: Higher liquidity usually means that you can buy or sell units more easily without slippage (difference between the desired price and the actual execution price).
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How to invest in an ETF?

An ETF trades on stock markets, like a share/ an equity. You can place an order with your broker (banker) as you would for any other share / equity. Our specialists can support you throughout your investment to find the best solution to meet your needs and your specific profile.