16 - What is an ETF?

An exchange-traded fund (ETF) tracks benchmark indexes like the CAC 40. ETF managers do not have to pick between different stocks; they just follow the index according to its composition. ETFs are traded on the market just like shares.

[Woman] Hey! Hi!
[Man] Oh, how are you?
[Woman] Fine, thanks. Oh, hey, Graham mentioned you have a little trick to reduce equity portfolio management costs.
[Man] A little trick? And who's Graham? Your new business partner?
[Woman] Yes. Actually, no. I'll explain it later. You work with those ETF things, right?
[Man] Sure, but ETFs are straightforward. They're a type of investment vehicle like any other, except they have lower management fees than ordinary funds.
[Woman] Okay, but how much lower are we talking about? I mean, are ETFs like shares, or…?
[Man] No, they're different. Here, hold this. Thanks. Don't move. ETFs track benchmark indexes like the CAC 40 and are traded on the market like shares. ETF managers don't have to pick between different stocks. They just follow the index according to its composition. With ordinary funds, fund managers will try to outperform the benchmark index by overinvesting in securities with upside potential or by underinvesting when they think there's a downside potential. This involves doing a fundamental analysis and expense ETFs don't have.
[Woman] Okay. How do you go about buying ETF?
[Man] Like I said, ETFs are like shares that can be traded on the stock market. You trade them just as easily as you would shares. They are continuously traded so you know their value in real time.
[Woman] That's brilliant.
[Man] Yes, it's brilliant, but you have to be careful, because an index like the CAC 40 can surge just as it can drop.
[Woman] Do all the ETFs track the CAC 40?
[Man] Well, no, it's not only a French thing. ETFs track hundreds of indexes you can choose to invest in sector indexes, bond indexes, currency indexes, and pretty much anywhere in the world.
[Woman] So there's an ETF on US tech stocks like the Nasdaq?
[Man] Well, no, there's not just one. There's plenty! It's a highly competitive market.
[Woman] Can someone like me buy some?
[Man] Of course. It's commercially available in France. But I'd be a little bit wary of taking investment advice from your new business partner.
[Woman] Why?
[Man] Well, he refers to it as a trick. It's a bit tricky. 
[Woman] The thing is…
[Man] There's my tram! You know, the vehicle that gets me home. Vehicles take you places both in life and on the stock market.