Remember that the spread is the difference between the buying price and the selling price of a security. In fact, brokers apply a slight delta on the price of a share to be remunerated: the buyer buys something more expensive and the seller recovers something less than the market price. The margin is infinitesimal in the scale of a transaction, but thanks to the volume effect it constitutes an important source of income for the broker. The brokers, competing with each other on prices, will reduce the spread to a minimum level for a massively traded stock; conversely, an illiquid security is less profitable and brokers will apply a higher spread to stay within their costs. Consequently, the level of the spread is inversely proportional to the volume of transactions: therefore, it is a good indicator of the level of liquidity of an ETF stock.
4. Choose an ETF with good replication quality
In theory, the principle of a crawler is to exactly replicate its reference index, but in practice there may be slight differences up and down. For example, the Lyxor PEA NASDAQ-100 ETF was up 1.08% for the month of November 2020, while its benchmark index was up 1.10%, a slight difference of 0.02%.
✅ Why can an ETF deviate from its index? There are many, here are some examples:
- A capitalized ETF cannot materially reinvest the dividends received in all the shares, the management company must make decisions. In addition, the cash receipt of the dividend occurs well after the coupon release, which is not always taken into account by the index.
- The management company can lease shares held by the index fund, which provides additional income.
- There may be distortions related to local withholding taxes when the tracker is invested internationally.
This difference is measured by tracking error, which corresponds to volatility (a measure of deviation from the mean). This gap can also be measured annually, this is called the tracking difference.
We recommend that you take a look at the tracking difference of the chosen ETF before investing in it.
5. Check emitter quality and pending tracker volume
We recommend investing in ETFs Managed by Strong Issuers have a showcase The main ones are:
- In France: Lyxor (subsidiary of Société Générale), Amundi (Crédit Agricole group), BNP Paribas, Ossiam (subsidiary of Natixis)
- In Europe: Deutsche Bank DB-X, UBS
- In the United States: Vanguard, iShares (subsidiary of Blackrock)
The volume of outstanding balances is also an interesting element to take into account, since this gives you a guarantee of stability. In fact, a Tracker brings more income to its management company the greater the amount managed. However, it can happen that an ETF with few assets is closed because it is not profitable enough, then all the shares of the fund are resold and investors see their shares converted into cash… whether they are in capital loss or capital gain! In addition to this risk, it can create discomfort for those who have built long-term wealth by regularly investing in this ETF.
In summary, we recommend that you invest in high volume operators (at least more than 50 million euros) managed by a quality issuer.
Choosing an ETF: what are the different types of trackers?
In addition to the five tips listed above, other details will have to be taken into account before choosing your ETF, depending on your trading plan. Indeed, there are several types of ETFs suitable for all situations: ETFs with physical or synthetic replica, with redistribution or reinvestment of dividends, eligible or not for the PEA… we detail these subtleties.
There are far fewer ETFs eligible for the PEA than to be deposited in a securities account. However the PEA is a very tax efficient package, since after five years of detention, taxes are only 17.2% and not 30% as in the securities account. how do we explain in our article, the PEA is a very interesting investment, but you need to verify that the ETFs you want are eligible. You can find here the list of ETFs for a PEA.
Physical or synthetic ETFs
One of the characteristics of the PEA is that you can only invest in european stocks. However, among the ETFs eligible for the PEA, some allow to replicate the NASDAQ or the S&P500. These are synthetic ETFs: in order to replicate indices normally inaccessible to the PEA, the managers of the trackers in different parts of the world accept exchange the results of their respective actions (both above and below). Thus, the ETF can replicate the desired index, even in the PEA, since at the base it will be invested in European shares, even if the results are exchangeable. this is called the exchange.
The redistribution of dividends
This is a detail that can be important depending on the type of investment you want. In fact, if you want collect liquid dividends every year or so, you’ll need to make sure the ETFs you choose redistribute dividends. Otherwise, they are automatically reinvested by the organization, which is replicated in the ETF price.aged Trackers
When investing in ETFs, one does not invest directly in the stock itself, but in the index that it tracks. This allows effects as if you choose an ETF with leverage. Consists in multiply potential gains…as well as losses. Thus, when you invest €1,000 in an ETF with x2 leverage, it is as if you had invested €2,000. If the stock takes 10%, the profit will be €200. On the other hand, if you lose 10%, it will be -200€. So, with this technique, while the gains can be very tempting, the losses can also be greater than the investment : if the share loses 60%, these will amount to €1,200 (while the initial investment was, as a reminder, €1,000). Therefore, it is necessary to handle this instrument with care.
Choosing the right envelope to invest in ETFs
We’ve covered how to choose the right trackers, but now it is necessary to choose the envelope in which to place them. Remember there are three:
1/ The ordinary securities account (CTO), which allows you to invest in any ETF in the world. The choice will depend on your broker, knowing that the best brokers generally have an extremely large catalog. Capital gains are taxed at 30%.
2/ The PEA, which works like the CTO except that you have to keep the money for 5 years, and that the catalog of trackers is much more limited (see our article on ETFs eligible for the PEA). The counterpart is that you benefit from a tax advantage on capital gains at exit: 17.2% instead of 30%.
3/ Life insurance In addition, you benefit from a tax advantage based on the age of the contract and the capital is not blocked. On the other hand, the catalog of ETFs depends on the insurer: some may offer around a hundred while others are limited to around ten or even zero… In addition, the insurer applies annual fees to the amount invested, which increases the overall cost. .
According to the US, to invest in ETFs the most interesting endowment is the PEA. The catalog is certainly a little less extensive, but the main world indices are available and are enough to build a diversified and high-yielding portfolio. In addition, the capital placed in a PEA is said to be “locked”, this is not entirely correct: you can withdraw your assets before 5 years, simply the PEA automatically transforms into a CTO and you will not benefit from the ‘benefit tax. Therefore, the capital placed in a PEA can be recovered at any time if necessary.