According to a recent article in Les Échos magazine, index management, also called passive management, is attracting more and more investors in Europe. Although they remain below the volume of US mutual funds in the sector, net inflows increased by 64% in 2021 (+$194 billion) and assets under management increased by 24.7% (+1,600 .000 billion by the end of December 2021). . This type of investment is particularly attractive to many French people who want to invest in stock market investments.
What is an ETF?
To understand how an ETF works, it’s important to start with the definition. THE”Exchange-traded fundare financial investment funds that are a copy of a certain index. They are also called index funds or trackers. Instead of building their own stock portfolios, investors buy a large number of stocks together. How an index or passive management works is to copy a stock market index by buying the exact same stocks as a stock market index. For example, there are ETFs that copy the CAC 40 index (representative index of the 40 most traded French companies). This is called a physical copy. You can also choose indirect copy, which will try to copy variations only with exchange contracts signed between the manager and the bank.
What are the benefits of investing in ETFs?
This type of investment fund offers many advantages.
Easy investment
Initially, these are investment funds entrusted to the manager. So it is very easy to invest money even without knowing the stock market. ETFs are also affordable investments. Firstly, because the commissions are lower than those of actively managed funds (less than 1%). But also because the collective reality makes it possible to buy more shares.
Diversified investments
ETFs are a very simple way to diversify your investments. Any financial or real estate investment advisor will tell you that you need to change your investments. This serves to dilute the risk in the event of a loss. This means that we must certainly change the types of investments, but also learn to change investments in investments. For example, if you invest in an ETF that tracks MSCI World, you’re tracking the performance of 1,800 companies across industries in 23 countries.
Possible collection of additional income
When you buy shares of an ETF, the manager must redistribute the profits. For this, there are two possibilities. Dividends are capitalized and reinvested in new stock purchases or dividends are distributed at regular intervals. This choice depends on each ETF, the information is available in a legal document called a “prospectus” that details how the fund works. Savers looking for additional income will choose the second option, and those looking to invest for the long term will choose the first. The experts will give you lots of advice to choose the formula that best suits your needs.
Investment vehicles present a capital risk. Past performance is not indicative of future performance.