ETFs (Exchange Traded Funds)

October 14, 2022

5 minutes read

ETF (Exchange Traded Funds), which are sometimes called trackers, are increasingly used worldwide, whether by professionals or individuals. In the following graph, we can observe that the amount managed (total outstanding) by ETF increased from $ 400 billion in 2005 to $ 5,500 billion in late 2019. This also represents an annual increase in the order of 20%. Also, to give an order of magnitude, the capitalization of all CAC 40 companies is somewhat greater than 1,000 billion euros.

There are practically 7,000 ETF in the world! The choice is large.

In Europe, according to Morningstar, ETF represents7.5% of all money managed by funds. This figure was only 5% five years ago.

This is a real revolution in the world of finance. A paradigm change from which all savers can take advantage of. This is probably the best way to invest in the stock market.

The definition of ETF (Exchange Traded Funds)

It is often said that ETFs are indexes listed on the stock market. For example, an ETF CAC 40 will replicate the performance of the CAC 40 index. For this, it will invest in all CAC 40 companies automatically and instantly.

However, from a purely formal point of view the ETF are funds, like all the other funds that can be found in his banker. However, unlike conventional funds, they are listed on the stock market. That’s all !

What is a fund or an OPC?

Let’s already come back to the definition of a fund. A fund, which can be found under the name OPC (collective investment organization), FCP (common investment fund), SICAV (Investment company with variable capital) or UCITS (collective placement organization in securities) For you a basket of shares, bonds or other securities (gold, raw materials, currencies, etc.). As, diversification on the stock market is very important, it makes things easier. The saver is not obliged to buy the stocks and the financial area of the fund for himself, investing in many different companies.

The saver trusts the fund manager to invest well, that is to say invest in good businesses and at the right time. It’s supposed to give it a good performance. These funds are not listed on the stock market. You must buy them from distributors: bankers, brokers, insurers.

Advantage of ETFs: diversification at reduced costs

By investing with a tracker, you have the advantages of a traditional fund without having the drawbacks. Your investment is diversified at a lower cost:

You take advantage of the overall movement from a geographical area without undergoing the failures of an isolated company;

By eliminating superfluous intermediaries, the performance of index funds is not cut by excessive costs.

Finally, note that most independent funds are listed continuously, so they are negotiable at any time, during the opening hours of the stock markets. Emitting management companies intervene regularly to ensure the liquidity and correspondence between their price and that of the underlying index.

Interest of ETF (Exchange Traded Funds) and trackers

A first interest of trackers: performance

It follows from this that more than 80% of funds cannot beat the index with which they must be compared or an equivalent ETF.

In addition, if it is possible to know a posteriori what are the 20% that have outperformed historically, it is almost impossible to know it in advance. Also, there is a very great dispersion of the performance of classic funds. On the other hand, the performance of the ETFs according to the same index is, by nature, almost identical. It is therefore much less risky to invest in ETF.

The graph below gives an example on international actions:

Second interest of index funds: transparency

Another asset of passive funds is transparency. We know exactly what we are investing in. An active fund can change strategy without you realizing it. This is very important when you want to build an ETF portfolio, as described in this article.

Investors were not mistaken, passive management is gaining incredible market share: 45% in the United States and 25% in Europe according to this graph below (source: UBS).

Tools to choose a tracker

To find these ETFs, you have to look for them on sites such as Morningstar. This article gives precise instructions on this subject. You have to select ETF specifically eligible for PEA if you want them to be specifically eligible for PEA. For life insurance, it’s a little different. ETF must be selected from the list of available account units (UC). It’s not always easy to find them.

Certain life insurances make it possible to directly select ETF (also called “listed index funds”). But it is sometimes not possible, it is necessary to filter according to the transmitters (Lyxor, Amundi, Ishares …). You can deepen the subject thanks to my article on the best insurance.

Buy and sell an independent fund on the stock market

As I explain in this article on how to carry out transactions on ETFs, it happens as for actions. You can negotiate ETF on the stock market on its ordinary title account (CTO) or its PEA. It is preferable to place an order with a slightly limited course below the lowest sale price if you buy an ETF, and slightly below the highest purchase price if you sell an ETF.

The risks of trackers

But are ETFs dangerous products? It is normal to ask this question when investing your savings hard won.

AMF study on the potential risks of ETF

The AMF (Financial Markets Authority) rightly did a study on this subject. Let’s do a check in.

Risks related to trackers

The risk of collateral, that is to say that the fund is (partially) bankrupt. This risk does not seem higher to me than for a classic fund.

The risk of decorrelation in relation to the followed index. There are crazy guards on Euronext, and it seems weak on the ETFs with high stakes depending on conventional indices.

The risk of liquidity, that is to say that it is difficult to sell or buy the ETF at a correct price. Similarly, the risk is low on the ETFs with high stakes depending on conventional indices.

The impact of ETFs on the market

The impact of ETFs on the underlying markets. Indeed, one might think that the growth of the ETF would deregulate the markets since fewer and fewer managers would be harmful to define the right prices. However, we are not there yet. ETF shares represent 8% of global capitalization in equity according to my calculations and the AMF calculated that only 1.1% of European shares were linked to investments through ETF. In addition, it should be noted that in the United States, where market share is much more significant than in Europe, active managers find it even more difficult to outperform the market and fund management costs are constantly lowering.

Investing on the stock market is risky in the short term

This article on the risks of ETF tells you more. But what must be remembered is that the ETF is not necessarily a danger in itself. What is potentially a risk is what an ETF is invested in. It is clear that an ETF in small Vietnamese capitalizations will be more risky than an ETF in large American actions.

The scholarship makes ups and downs. Actions can drop quickly, by 30% and even 50%. This is clearly what we were able to experience in the various stock market crashs. But it should also be remembered that the scholarship had an exceptional long -term performance. This is an opportunity not to be missed.