ETF: explanation and advice for an investment

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By investing in an ETF, you benefit from diversified investment at a lower cost.

ETFs are preferred investments in 2020 within your life insurance. Run an ETF investment simulation.

Still little known to the general public, ETFs (for Exchange-Traded Fund) or listed index funds, also called trackers, hide under a complicated name a simple and effective way of investing in the stock market.

They allow you to invest instantly and simultaneously in hundreds or even thousands of companies, as well as in government bonds (also called treasury bills).

Definition of an ETF

An index fund is first and foremost an investment fund that seeks to replicate the performance of a stock index. For example, an ETF with the CAC 40 as its benchmark will allow you to invest in all CAC 40 companies instantly and simultaneously. Its performance, as expected, will be equivalent to that of the CAC 40.

The management companies that manage these indexed funds offer you the opportunity to invest your capital in them. Therefore, you no longer need to choose one of the companies to create an asset portfolio, these share baskets allow you to invest in several hundred companies at once.

ETFs differ from other investment funds.

A traditional investment fund (SICAV or FCP) will seek to build up an asset basket, piece by piece, with the aim of “beating the market”, i.e. obtaining a better return than the average of other investors. This approach mobilises a large amount of resources (analysis, research, time) from the management company that markets it. In return, it will charge significant fees. These costs ultimately reduce the return obtained by the investor. As a result, the fund’s objective outperformance is rarely present.

By contrast, an index fund replicates a stock market index. A stock market index is generally composed of the largest companies in a country or industry. It therefore tends to reflect the economic development of a geographical area or an industrial sector. There are also indices for Treasury bills, which combine multi-state bond debt and eco-friendly ETFs.

The objective of an index fund is to follow the performance of its index as closely as possible. It is therefore managed passively: it costs very little.

Advantage of ETFs: low-cost diversification

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

  • It benefits from the general movement of a geographical area without suffering the failures of an isolated business;
  • By eliminating redundant intermediaries, the performance of index funds is not compromised by excessive fees.

Finally, please note that most index funds are traded continuously and are therefore negotiable at any time during stock market opening hours. Issuing management companies intervene regularly to ensure liquidity and a match between their price and that of the underlying index.

How do I invest in an index fund or ETF?

To invest in an index fund, you have two options. The first is to go through a broker or your bank. However, be careful, not all offer the possibility of investing in index funds. You should also be aware of the transaction fees charged by your establishment. Finally, you will need to choose carefully the index funds in which to invest. A financial investment adviser can help you build your portfolio. 

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