ETFs (Exchange-Traded Fund) are investment funds listed and traded on a stock exchange. In recent years, ETFs have become increasingly popular among investors, as they are considered accessible, transparent, and relatively low-cost investment instruments.

An ETF enables investors to gain exposure to multiple securities through a single transaction. This allows an investor to diversify their investment portfolio quickly and efficiently, without the need to purchase each security separately.

For example, by investing in an ETF that tracks the MSCI World Index, an investor gains exposure to more than 1,400 stocks through a single transaction. This is one of the key advantages of ETFs.

ETFs are traded on the stock exchange during stock exchange opening hours and can be bought or sold through a financial intermediary, just like regular shares.

Main categories of ETFs

ETFs are divided into two main categories:

• Index ETFs

Index ETFs, also called passive ETFs, replicate the performance of an underlying index (also known as a "benchmark index") as closely as possible. This means that the fund follows changes in the value of the selected index during both upward and downward market movements. These ETFs currently represent the majority of the European "UCITS" ETF market.

• Active ETFs

These ETFs follow an active strategy. In other words, their management or portfolio structure is not limited to simply replicating an index.

How do index ETFs replicate the performance of a stock market index?

There are two main methods to replicate the index performance: "physical" replication and "synthetic" replication.

• Physical or direct replication

The ETF directly holds the securities that make up the index.

• Synthetic or indirect replication

The ETF does not directly hold the securities that make up the index. The ETF then enters into a financial agreement – known as a performance swap – with one or more third parties, usually an investment bank, which commits to replicate the ETF index's performance and return this performance to the fund. 

Types of ETFs

ETFs can also be distinguished by the types of assets in which they invest.

• Equity ETFs consist of a basket of shares from different companies. Some ETFs focus on companies from specific sectors, such as technology, telecommunications, clean energy, or consumer goods, while others concentrate on particular regions, providing investors with access to international equities.

• Bond ETFs derive their returns from the underlying bonds, which may be government, corporate, or municipal bonds. Unlike individual bonds, bond ETFs generally do not have a fixed maturity date.

• Sector ETFs track a specific sector or industry, such as the automotive industry or energy, and may include different types of investment assets within the same sector.

• Commodity ETFs invest in commodities such as oil or gold.

How to choose an ETF?

Before choosing an ETF, it is important to define the investment horizon (short, medium, or long term) and the risk level investor is willing to take for their savings project.

1. Define the role of the ETF within the overall investment strategy

It may be used to diversify the portfolio, increase exposure to a particular sector or geographic region, or reduce overall risk.

2. Choose the type of index, from the broadest to the most specific 

This may be an international, regional, thematic, or sector-specific index. It is important to understand the composition of the index and what best suits investor’s risk profile.

3. Understand the structure and performance of the fund

When choosing an ETF, it is important to consider the following factors:

• management fees and administrative expenses, as they directly impact the net performance of the fund;
• net performance;
• the fund’s transparency and the application of ESG criteria;
• tracking error, which shows how accurately the ETF replicates its underlying index. The lower the tracking error, the more efficient the index replication is considered to be.

4. Choosing the investment envelope

When selecting an ETF, it is also important to determine the format through which the investment will be made, whether via a securities account and/or a savings plan.