In this article, I will reveal everything you need to know about ETFs/trackers. In the end I will reveal which is the best CAC 40 ETF:
Do you know the best investor in the world? His name is Warren Buffett. In the Financial Times columns, he advised his wife and investors around the world to invest in ETFs.
Enough to make you want to know more, right?
Etf, tracker: What is it?
ETFs (an acronym for Exchanged Traded Funds), also called Trackers in Great Britain, have been very successful in recent years. They now represent up to 9.5% of the total volume traded on European stock exchanges (source: Deutsche Bank European Monthly ETF Market Review – March 2015).
Its purpose is to track the performance of a stock index, a bond index or a commodity index. These indices can be general (CAC 40) or sectorial (automobile, insurance).
There are currently around 1,500 ETFs on British stock exchanges.
ETF, tracker: What is the underlying?
For those new to the stock market, the term “underlying” may sound barbaric. This is not the case: the underlying is the index reproduced by the tracker.
For example, the underlying of the CAC 40 ETF is… The CAC 40! And the 40 shares that make it up.
ETF, tracker: many advantages
Trackers, unlike the purchase of real estate or a gold bar, are traded on Euronext Paris with the same ease as an ordinary share, and the quotation is continuous from 9 a.m. to 5:30 p.m.
Therefore, followers can be considered as “liquid” investments.
Trackers, as we will see a little later, may be eligible for ADP, thus reducing taxes. Unlike a stock investment, you will never receive dividends, it is the ETFs that receive them, which lowers your tax bill accordingly.
We will also see later, it is possible to buy leveraged trackers: for example short trackers that reverse the performance of an index (the CAC 40 loses 1%, you gain 1%).
The ETF cannot go bankrupt unlike stocks. As you know, if the market price of a stock falls too low, it leaves the index and is replaced by a new stock. It’s still possible for a CAC 40 stock like TOTAL to suddenly go bankrupt overnight, but it’s unlikely that all 40 CAC 40 stocks will go bankrupt at the same time. An investment in followers is therefore less risky than an investment in shares.
ETFs automatically re-copy their benchmark index. It is the word “automatically” that is important here, there are no management teams to pay and it is the fees that are affected: 0.10% to 0.40% for ETFs, 5% on average for mutual funds.
The types of ETF
There are types of ETFs that behave completely differently, although they sometimes copy the same index:
Standard ETF
Standard ETFs simply buy all the shares of the benchmark index for you.
Trackers therefore present a simple and economical way to build a complete portfolio: buying trackers is simpler and less expensive than buying all the shares constituting the underlying index.
Leveraged ETF
Leveraged ETFs multiply daily returns through leverage from loans. You are not the borrower, but the issuer of the ETF.
In practice, this allows you to multiply your losses and gains by leverage. In the case of leverage 2, if the CAC 40 loses 1%, leverage 2 of the leveraged ETF CAC 40 will lose 2%. If the CAC 40 gains 1%, you gain 2%.
There are even ETFs that multiply the return of an index by 2, 3 or even 4.
Imagine you buy a CAC 40 leveraged ETF 4. If the CAC 40 loses 10% in a week, you will lose 10%*4 or 40% of your initial investment.
The opposite is also true: if the CAC 40 earns 10% in a week, you earn 40% personally.
Leveraged ETFs can be identified by the name of the tracker which usually includes “Leverage”, for example: LYXOR UCITS ETF LEVERAGE CAC 40 copies the CAC 40 with a leverage of 2.
