Why invest in ETFs

ETFs are simple investment vehicles offering many advantages. While seeking to replicate their benchmark index as closely as possible whether the Index rises or falls, they combine the advantages of a UCITS IV* regulated index-tracking fund with those of equities (easy to buy and sell) in return for low fees. 
As for any financial instrument, investing in ETFs involves risks which should be taken into account prior to making any investment decision. Click on  here  for a list of related risks. 
* Directive 2009/65/EC  of 13 July 2009

Key facts

Simplicity

ETFs are listed index funds that aim to replicate as closely as possible the performance of their benchmark index, whether it rises or falls.

Each ETF unit can be traded on Stock Exchanges in the same manner as equities and can therefore be bought or sold during trading hours.

Diversification

By buying an ETF unit, investors can gain exposure to a specific market with a single transaction, making it easy for them to diversify their portfolio.

In this way, ETFs facilitate access to the main asset classes (equities, bonds, commodities, money market) as well as investment in different sectors and geographic regions or according to specific investment styles and themes.

Low costs

ETFs offer an attractive cost structure since, among other advantages, they are exempt from subscription and redemption fees when traded on the stock market. (NB: the amounts of the subscription fees indicated in the prospectus, apply only to the primary market). 

Their management fees, which are usually lower than other comparable financial instruments, are deducted directly from the daily net asset value. 
Transactions costs may occur when trading ETFs.

Liquidity

ETFs are liquid market instruments that can be readily bought and sold via market makers, who act as counterparty for purchases and sales during market opening hours on the various exchanges. Their aim is to provide low bid/offer spreads.
Investors therefore have the flexibility of being able to buy or sell ETF units whenever they wish during trading hours, except when trading is suspended.

ETFs also have the added advantage of presenting multiple ways to be bought:

  • on the stock market, in real time;
  • via a broker, over the counter;
  • via market makers (authorized participants).

As ETFs are open-ended funds, market makers are able to create ETF units when there is high demand.

ETFs involve liquidity risks. Click here for more information.

Transparency

Regulations require fund managers to respect strict investment rules.

ETFs are regulated products, compliant with European standards (UCITS IV), and their value is known at all times through the indicative net asset value.

Another guarantee of transparency  compared to other mutual funds relies on the disclosure of ETFs’ holdings.

Investment strategies

01 - Portfolio diversification

ETFs are a useful tool with which to diversify a portfolio on a geographic and sector level. They can be adapted to allow exposure to markets that are less readily accessible, such as emerging markets or corporate bonds.

02 - Core-satellite strategies

A core-satellite strategy aims to combine:

  • low risk (or “core”) assets, to deliver returns corresponding to the performance of the market;
  • high yield (or “satellite”) assets, to generate outperformance.

03 - Tactical positions

During periods of high market volatility, investors may wish to react very quickly by, for example, increasing the weighting of a holding to rebalance a portfolio or adjusting the allocation between various asset classes.
ETFs are useful tools for those wishing to adopt tactical positions, as they are flexible and offer broad possibilities in terms of exposure.

04 - Risk management

ETFs are useful hedging tools for investors, they offer solutions to help manage interest rate risk for fixed income as well as currency risk for equities.
ETFs can offer a packaged solution to mitigate these risks through the use of indices combining exposure to a given market and a interest rate or currency hedging.

How to invest

On the stock exchange, in real time

Via a broker, over the counter, during trading hours

Via market makers (AP), over the counter, at the Net Asset Value

ETF versus futures

Indeed, ETFs have many strength points that make them efficient instruments to invest in.

 

  • Costs: European regulation seriously impacted the banking industry in recent years implying higher costs of Futures for long positioned end investors, which are being challenged by ETFs
  • Simplicity: Futures need to be rolled at each expiry, which has a cost and induces a market risk, while investors can buy and hold ETFs after a unique transaction
  • Diversification: ETFs, contrary to Futures, offer a wide range of benchmarks and allow investors a broad choice to answer any specific market conditions and investors’ strategies

ETFs are more and more considered by participants who were traditionally more attracted by futures in their allocation.