Capital at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.
ETFs SIMPLY EXPLAINED!
Capital at risk. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.
Learn on this page how ETFs are defined, how they track an index and what their names mean.
Physically replicating ETFs hold the securities of the index they track. Two methods are used to replicate the index: full replication, meaning the ETF holds all securities in exactly the same weighting as the index; and partial replication, where only parts of the index securities are replicated in the ETF. The latter is used, for example, for very broad or illiquid indices, ie whenever the cost of fully replicating the index can negatively impact the performance of the ETF.
A synthetic ETF does not hold the securities of the index but instead uses a financial derivative, usually a so-called swap. Such a swap agreement specifies that the ETF will receive from the counterparty the return of the benchmark index, but less other variable costs, called swap spreads, which depend on current market conditions. Derivatives-based ETFs offer the opportunity to invest in markets that are difficult or impossible to access for physically replicating funds, such as commodities or certain emerging markets.
Physical Replication - Full
Physical Replication - Optimised/Sampled
Synthetic / Derivative
The index to be replicated is reflected in the naming of the ETF. In addition, there is the name of the provider, a regulatory note, the currency and the share class, which is the information about whether the ETF distributes or reinvests the income. In the example below, ‘ACC’ stands for ‘accumulating’ – ie reinvesting. Distributing ETFs are marked with ‘D’, ‘Dist’ or ‘Dis’ for ‘distributing’.
The abbreviation ‘UCITS’ means that the ETF must adhere to special European guidelines. These serve to protect private investors and are controlled by the national supervisory authority.
Source: BlackRock. May 2023. Only for illustrative purposes.
ETFs try to replicate an index. But what exactly is an index and how is the appropriate ETF created? You can find the answers to these questions here.
An index is a collection of securities intended to represent a particular market or market segment. An index is a theoretical concept and a barometer of the change, over time, in the positions it contains. It can be as broad as the entire US stock market or as narrow as a single country or industry. Indices are created by index providers such as MSCI, S&P or Dow Jones Company.
When creating an index, the providers define a wide variety of criteria that the values in the index must fulfill in order to be included in it. A wide variety of criteria and combinations are possible here, which is why there are so many indices. Possible criteria are for example:
Best known index providers & indices
ETFs are financial instruments that make the various indices investable. ETFs attempt to replicate as closely as possible the underlying index used as a benchmark. Once an index provider has created an index, ETF providers such as iShares can launch the appropriate ETF. This is then given a security identification number so that it can be clearly identified. The ETF can now be bought and sold on each trading day without an issue surcharge.
Investors can choose from over 400 iShares ETFs1. But how do you find the right ETF for your investment goals among this variety of products?
ETFs try to replicate indices. And since there is a wide range of indices, there is also a wide range of ETFs to choose from. Because of this variety, one's individual investment goals can be mapped very specifically. One can invest for the long or short term, in different asset classes, and in different regions and countries, sectors or strategies. In addition, many ETFs are also available as a savings plan, so that you can usually invest in the ETF of your choice for as little as €25 per month.
Examples for different ETF categories
iShares offers you a total of over 400 ETFs1, many of which are also available as a practical savings plan. Check out your choices here or with your bank or advisor and see which ETF sounds good to you.
How can you use ETFs to structure your investment?
Determine your risk profile and choose a suitable allocation of the different asset classes. Combine different asset classes and regions to minimise risks. Examples of portfolios that are suitable for starting long-term asset accumulation with ETFs can be found here:
Learn about the current market environment when you invest.
1 Data as at 31 March 2021 unless otherwise stated
So you’ve decided to invest with Exchange Traded Funds? Here we show ways on how you can access and implement ETFs in a portfolio. Regardless of which bank, direct bank or broker you prefer, you can find a suitable institution with which iShares works. iShares works with banks and brokers as well as digital asset managers.
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