Trackers and ETFs: a guide to investing well

What is the point of going deeper into an ETF guide without understanding what an ETF really is? Fortunately, an ETF has nothing to do with a complex financial product. It is simply a mutual fund (such as a UCITS, SIVAC, FCP, FCPI, etc.) with some particularities.

When you invest in a fund, and therefore in an ETF, you invest in all the securities held by the fund: shares, bonds, etc.

The particularity of an ETF can be guessed from the name it bears (for English speakers):

In Britain, this gives a background that is listed on the stock exchange. This is what is special about ETFs: you can buy and sell your shares in the same way as you buy and sell a share.

To invest in a traditional fund, you buy shares in the fund, whose value is calculated once a day. To invest in an ETF, you buy shares in the fund, whose price is known in real time. Simply send a purchase order to an online broker available in Great Britain.

That is because of its “technical” peculiarity, but that is not all. ETFs are also the revolution in index management.

Index-linked ETFs represent a large majority of the ETFs available in the market. The objective of an index-tracking ETF is to track a stock market index:

A CAC 40 ETF will follow the price development of the CAC 40 GR
An S&P500 ETF will track the price of the S&P500 index

Unlike traditional funds, they do not seek to select stocks or bonds, believing that these will work better than others. Index ETFs have a simple objective: to replicate a stock index.

This is why we call an index ETF a tracker, from the English verb “to track” = to follow.

The history of ETF

The idea of index management is not new. The first attempts to create what looks most like a tracker were index shares in the S&P 500 in 1989, then the TIPs35 in Toronto, Canada in 1990.

It was in 1993 that the first real ETF was created. It remains one of the most widely used ETFs for investors today: the SPDR S & P500 Trust, also called SPIDER.

Over the years, ETFs have gained in popularity, first among institutional investors and more recently among the general public.

What are the advantages of investing with an ETF?

The advantages of investing with ETFs are many. Firstly, they make financial investment more accessible.

When you start in the stock market, they offer a great opportunity.

In fact, investing in index management will be much easier for you than investing in stock selections that you will have to analyse one by one. It requires less skill. They allow you to set up various strategies aimed at increasing profits, reducing volatility or risk.

Index management with ETFs is easier to understand. Acquiring expertise in this area is not rocket science. With ETFs, individuals have the opportunity to manage all their financial wealth themselves. You can create a balanced and diversified ETF portfolio on your own with a few hundred euros.

ETF or stock selection?

Stock picking is the most popular way to invest in stocks. It consists of making a selection of individual shares: analysing a company, its economy and its financial results in order to decide to invest in it.

Investing in ETFs frees you from all the skills you need to select individual stocks. Stock picking allows for better performance, but at the cost of high skills and hard work.

Therefore, ETFs should take precedence over stocks for those who wish to benefit from financial market opportunities without investing time or training.

They are, because the stock market is, historically and repeatedly, despite financial and economic crises. Remember that the financial markets have gone through world wars without this preventing the economy from progressing in the long term.

As ETFs replicate well, they do so as well. The investor only has to determine which economic sectors will offer him better returns in the future: ETFs allow him to replicate this performance, quite simply.

Spreading risk across many values

ETFs eliminate the risk of bankruptcy for an individual company by allowing it to invest in hundreds of companies simultaneously.

If you invest in many companies that are exposed to the economy of a single country, you run the risk that the economy of that country will fail and affect all the companies you own.

By investing with ETFs, you can spread your risk across different global economic zones, or even the entire world economy with the MSCI ACWI (All Country World Index) ETFs.

It is a geographical or sectoral diversification (sectoral if broken down by economic sector).