ETFs: how to choose a tracker when you are starting out

In short:

1. An ETF does not beat the market, it follows it: performance comes from the index you pick, not from a manager’s skill.
2. Ongoing charges apply every year to the whole balance, and are the one element you control with certainty.
3. Physical replication actually holds the securities, synthetic replication goes through a swap contract with a counterparty.
4. A fund that is too small risks being closed, which forces an exit at a moment you did not choose.

What an ETF really is

An ETF, or tracker, is an exchange-listed fund whose objective is to reproduce the performance of an index, such as the MSCI World, the S&P 500 or the CAC 40. By buying a unit, you indirectly hold every company in that index, in the same proportions.

The appeal fits in one sentence: you get very broad diversification in a single line, at a very low annual cost.

The five selection criteria

1. The index tracked. This is the most structural decision, well ahead of the choice of issuer. An MSCI World ETF gives exposure to more than a thousand large companies in developed markets; a sector ETF concentrates risk instead. Start by deciding what you want exposure to.

2. Ongoing charges (TER). They are taken every year from the fund’s assets, continuously and invisibly. On major indices, the gaps matter over the long run.

3. The replication method. Physical replication means actually holding the index constituents. Synthetic replication goes through a swap with a bank, which introduces counterparty risk but allows international indices to be held inside a French PEA.

4. The size of the fund. A small ETF can be closed by its issuer if it is not profitable. Liquidation does not destroy your capital, but it forces you out at a moment you did not choose, with the tax consequences that follow.

5. The distribution policy. An accumulating ETF reinvests dividends automatically, which simplifies both management and taxation. A distributing ETF pays them into your account, useful if you are looking for income.

The currency reflex

A dollar-denominated ETF bought in euros exposes you to the exchange rate, whether or not the fund is hedged. That exposure is neither good nor bad in itself, but it should be deliberate: it adds a source of variation independent of equity markets.

Frequently asked questions

How do you choose an ETF as a beginner?

Start with the index, which drives most of the performance: a broad developed-market index is the most common core. Then check ongoing charges, the replication method (physical or synthetic), the size of the fund to avoid a closure, and the distribution policy, accumulating if you do not need immediate income.

What fees apply to an ETF?

Ongoing charges, or TER, are taken each year from the fund’s assets: generally 0.10 to 0.25% for a broad developed-market index, more for emerging markets or thematic ETFs. On top come your broker’s dealing fees on every order, and the wrapper’s fees if the ETF sits inside a life insurance policy.

Is an accumulating or distributing ETF better?

An accumulating ETF reinvests dividends inside the fund, which avoids having to reinvest them yourself and simplifies tax tracking during the accumulation phase. A distributing ETF pays dividends into your account, which only makes sense if you want regular income now.