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What is ETF trading?

What is ETF trading?

Illustration: What is ETF trading?

ETF overview

ETF stands for Exchanged Traded Funds. They are known as trackers in France.

ETFs are real index funds which trade on a Stock Exchange and track the performance of an index such as the CAC40 or Euronext 100. Like shares, they are easy to buy and sell all day at real time market prices and with the same brokerage fees.

ETF rules

ETFs are transparent and aim to replicate the performance of a stock market index. An ETF represents a fraction of the index it is tracking. Thus, an ETF worth 1/1,000th e of an index is worth 45 Euros when the index is at 4,500 points. If the index rises above 5,000 points, the ETF is then worth 50 Euros, and conversely when the index falls.

ETFs can track market indices and global financial markets (for example: CAC 40, Dow Jones). But there are also sectorial indices (for example: pharmaceuticals, high tech, healthcare) or commodity indices (for example: gold, silver).

ETF funds are invested in the index they represent continually, whatever the number of outstanding securities, or how many are bought or sold.

What is the advantage of ETFs for individuals?

One of the benefits is that ETFs are listed at the Stock Exchange, so you join or leave them by simply placing an order to purchase or to sell. This can be done through your usual broker. ETFs, like shares, have an international identification number (ISIN) which makes it easy to place an order. The price of an ETF (its liquidating value) is updated once a day. You can, however, work out the liquidating value of an ETF by tracking its underlying index. Investors buy and sell constantly, thus feeding the market, based on a simple computation.

Another benefit is that investors can access the performance of hundreds of shares by buying a few ETFs. Starting with only a few dozen or a few hundred Euros, you can have the same level of diversification as the largest portfolios. This means small investors can achieve a healthy diversification in their investment portfolios and hence make it safer, as diversification is the basic rule when managing a portfolio.

Lastly, ETF investors are entitled to dividends. because ETFs include securities (shares) of the indices they are « tracking » and thus benefit from the dividends pertaining. These dividends are either paid to ETF holders once or twice a year (depending on the fund manager) or reinvested in the fund (hence, in the index).

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Last Update on 01/06/18

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