What is an ETF and how do I invest in one?
Silvia Bosoni, Group Head of ETFs at Euronext, explains what is an ETF, how they work and how to invest in them.
What is an ETF?
ETF stands for Exchange Traded Fund and it’s a fund that can be traded on an exchange just like a traditional financial instrument, and contains a basket of securities such as stocks, commodities, bonds, or a mixture of them. ETFs offer great diversification and risk management opportunities, which is typical of funds, and flexibility and transparency of information, typical of shares, and for this reason they are often a popular choice of investment for both institutional and retail investors.
How do ETFs work?
ETF providers, or ETF issuers as they are commonly known, create ETFs and then list them on an exchange, making them available to investors for trading. There are two types of ETFs: passive and active ETFs. Passive ETFs track an index, generally called a benchmark index and they are known as “passive” because they simply track the performance of an index. Investors usually pay a lower commission for passive ETFs because there is less cost to operate and manage this types of fund.
Active ETFs, on the other hand have the aim of investing in a portfolio of securities directly selected by an active manager and the process is called the “asset allocation” process and the asset manager continuously works on increasing the performance of the fund. Unlike passive ETFs, the investment strategy of active ETFs is established by the fund manager according to their investment strategy. Active ETFs are more sophisticated and therefore they might be a bit more costly.
How do I invest in an ETF?
Retail investors cannot directly access the stock market, so they need to go through a broker to buy and sell ETFs. There are several ETFs to choose from. For example, buying a passive ETF - like one having the Euronext CAC 40 as benchmark index, you will be given exposure to the 40 largest companies in France. This means that you will obtain an average performance of the index. This not only mitigates the risk but it’s also cost-effective as it would be very expensive to buy separately all the stocks of an index. While with one ETF, you get exposure to all the securities in which the ETF is invested.
How to choose an ETF
When looking to choose ETFs for your portfolio, you must first decide what you are interested in. Which asset class? A specific geography? Or sector? A certain theme? For instance, if you’re interested in investing in sustainable companies, it can be difficult for you as a retail investor to go through all the paperwork and research to find the right information. However, you can rely on the expert, the index provider, who will do this job for you. You can therefore buy ETFs tracking ESG indices to get your sustainable investment.
What kind of ETFs are listed on Euronext?
At Euronext, we have over 1,500 ETFs listed on our 7 European markets, covering a huge variety of themes, sectors and geographies. These are issued by leading and innovative asset management firms, continuously offering new ETFs to invest in. There is a lot of innovation out there to provide unique ETF products following the latest trends and supporting sustainable growth. Visit the Euronext website to discover our wide ETF offering and find more about ETFs trading.
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