What is an ETF? How to invest

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ETFs or trackers allow you to invest in the stock market by replicating market indices. They allow you to diversify your investments at low cost. 

Do you have a securities account or an ADP? You can invest in an ETF or a listed fund. These funds, also called index funds, are replicas of indexes. This means that, for example, by investing in a CAC 40 ETF, you can invest the entire CAC 40 at once.

In a previous article, we analysed the risks associated with ETFs and their taxation. Today we will focus on how to choose a tracker and how to invest.

The index: the basis of the ETF

The index is the basket of stocks or bonds that the tracker will try to replicate. Several companies dominate the index creation market. The best known is MSCI, but others such as Solactive or Bloomberg are also very present.

The role of these companies is simple. They create indices, which are baskets of stocks or bonds. The management companies, which create mutual funds, replicate these indices, in the case of ETFs. They can also, in the case of so-called active investment funds that do not track indices, use them as a benchmark to measure their performance.

The indices can be global or focused on a region or country. They can include or exclude several parameters. Large or small companies, district in a sector of activity, integration of ESG criteria.

This is other information that you will find useful before investing. Some ETFs specify the words “Acc” or “Dist” in their title. It means “Accumulate” or “Distribute”. In short, if you subscribe to an Acc ETF, you will accumulate the profits generated to grow your capital. If you subscribe to a Dist ETF, you will distribute these gains on the fly.

Both strategies can be good, it all depends on what you are looking for by investing in a tracker. The cumulative approach is best if you are looking for long-term benefits. The distributive approach is better if you are looking for regular income.

UCITS, what is it?

Many ETFs have UCITS in their name. This refers to the Directives on undertakings for collective investment in transferable securities. It is a regulatory term for a set of measures taken by the European Union that has made it possible to standardise information on funds in Europe. This allows funds to operate freely in all EU countries.

How do you detect ethical ETFs?

Many ETFs carry a mention in their name that identifies sustainable approaches. This may be the ESG citation. This designates an approach that takes into account environmental, social and governance criteria. The mention is the same in English and Britain. Some funds are labelled as SRI, or SRI in English, for socially responsible investment.

In addition, there are many thematic ETFs. Green bonds, clean technology, green energy, clean energy, gender equality, equality in the workplace… The names given by the managing companies are often indicative of their strategy.

How do I invest in an ETF?

Once you have chosen your ETF, all you have to do is follow the same process as for buying a share. However, be careful because not all ETFs are eligible for all products or all locations. In fact, as a Britainman, you may not have access to certain funds.

In addition, not all ETFs are eligible for the capital savings plan. Therefore, the securities account is the most practical if you want to have a wide variety of options. As for life insurance, this is the most complicated way to invest in an ETF. However, some insurance companies offer this type of fund in their units of account.

Also remember that an investment in an ETF is as risky as any stock market investment. While it allows you to diversify your portfolio, you can track your progress along with your other stock market investments.

Eddie Erwing

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