What is an ETF and how do I invest in one?
Silvia Bosoni, Group Head of ETFs at Euronext, explains what an ETF is, how ETFs work and how to invest in them.
Listen to the full interview. Watch the video.
What is an ETF?
ETF stands for Exchange Traded Fund. An ETF is a fund that can be traded on an exchange just like a traditional financial instrument, and is made up of a basket of securities such as stocks, commodities, bonds, or a mixture of these.
ETFs opportunities
ETFs offer great diversification and risk management opportunities, which are typical of funds, together with flexibility and transparency of information, typical of shares. 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 ETFs track an index, generally called a benchmark index. They are known as "passive" because they simply track the index's performance. Investors usually pay a lower commission for passive ETFs because there is less cost involved in operating and managing this type of fund.
- Active ETFs have the aim of investing in a portfolio of securities directly selected by an active manager through a process called the "asset allocation" process. The asset manager continuously works to increase the performance of the fund. Unlike passive ETFs, the investment strategy of active ETFs is established by the fund manager following the manager's own investment strategy. Active ETFs are more sophisticated and therefore they can be 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.
Example: the CAC 40 ETF
For example, buying a passive ETF that has the Euronext CAC 40 as its benchmark index will give you exposure to the 40 largest companies in France. This means that you will obtain an average performance of all the stocks in the index. This not only mitigates the risk but is also cost-effective, as it would be much more expensive to buy all the stocks of an index separately. With one ETF, you can get exposure to all the securities in which the ETF is invested.
How to choose an ETF?
When you are looking to choose ETFs for your portfolio, you must first decide what you are interested in. What asset class do you want to invest in? Do you want to choose a specific geography? Or sector? A certain theme? For instance, if you are interested in investing in sustainable companies, it can be difficult as a retail investor to go through all the paperwork and research to find the right information about each company. Instead, by choosing an ETF tracking an ESG index, 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 seven European markets, covering a huge variety of themes, sectors and geographies. These are issued by leading and innovative asset management firms, that are 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 out more about ETFs trading.