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Understanding Exchange-Traded Funds (ETFs)

ETFs, or “exchange-traded funds”, are exactly what the name implies: funds that are traded on exchanges, generally tracking a specific index.

October 28, 2022

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Key takeaways

What is an ETF?

ETFs, or “exchange-traded funds”, are exactly what the name implies: funds that are traded on exchanges, generally tracking a specific index.

  • Exchange: A public, regulated platform for buying and selling financial instruments for example, Credit Suisse ETFs are traded on the SIX Swiss Exchange, Deuche Börse, and Borsa Italiana
  • Traded: Bought and sold
  • Fund: A fund accepts money from people and institutions, and pools that money to buy stocks, bonds, or other financial instruments

When we put these definitions together, we see that an exchange traded fund is a pool of money invested in multiple financial instruments, while investors buy and sell units of the fund on a public, regulated platform.

It’s important to understand that units of the fund are traded just like regular stocks – anyone with access to a trading platform can do it – making ETFs a simple way to start investing. They are open-ended funds, which means that there is no fixed period for subscriptions and no limit on the number of units or investors.

Another thing to remember is that the portfolio of a given ETF is based on the replication of a particular index.

ETFs and index replication

What do we mean when we say that ETFs replicate indices?

An index is a basket of stocks, bonds, or other securities that belong to a specific sector of the market (e.g. tech stocks, financial services companies) or are linked by other characteristics like size or geographical region. However, investing directly in an index isn’t possible. That’s where index funds come into play.

ETFs are designed to replicate indices as precisely as possible. For example, the CSIF (IE) MSCI World ESG Leaders Blue UCITS ETF invests in stocks from a basket of companies selected by MSCI – an independent research company – for their high performance on environmental, social, and governance (ESG)1 matters. In other words, the fund holds sustainable stocks identified by MSCI, buying all the stocks that compose the underlying index.

Learn more about sustainable investing at Credit Suisse Asset Management, and be sure to review the details of our Sustainable Investing Policy.

Why invest in an ETF?

An ETF provides you with diversified exposure to a particular segment of the market. For example, say you want to invest in US-based tech companies, but instead of picking individual stocks, you want to invest broadly in the sector.

To get exposure to this part of the market, you could invest in the CSIF (IE) MSCI USA Tech 125 ESG Universal Blue UCITS ETF B USD. Buying units of this ETF will instantly give you a diversified investment in companies in the US market at the forefront of technology-driven transformation with high ESG2 performance relative to their sector peers.

Because ETFs are traded much like stocks, they are highly liquid, which means that you can both buy a position and sell off that position quite easily. This also means that the market price of an ETF unit will fluctuate throughout the day.

Investor assets used to buy stocks are kept entirely separate from the assets of the company that manages the fund. This practice, called asset segregation, means that money invested through the fund is safe even in the event the fund manager experiences financial difficulties.

One more benefit of ETFs is that they are low-cost ways of investing. Fees are quite low because ETF fund managers don’t select individual stocks, so they don’t invest a lot of resources into research.

How to trade ETFs

Simple, low-cost, offering quick access to a broad range of securities, ETFs are a valuable tool every investor can use to pursue their goals, both in the short-term and over the long haul.

Potential risks

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1 For further information about the ESG investment criteria and the sustainability-related aspects of the fund please consider the legal and regulatory documents of the fund (such as, e.g., the prospectus) and visit credit-suisse.com/esg. In addition to sustainability-related aspects, the decision to invest in the fund should take into account all objectives and characteristics of the fund as described in its prospectus, or in the information which is to be disclosed to investors in accordance with applicable regulations. 

2 For further information about the ESG investment criteria and the sustainability-related aspects of the fund please consider the legal and regulatory documents of the fund (such as, e.g., the prospectus) and visit credit-suisse.com/esg. In addition to sustainability-related aspects, the decision to invest in the fund should take into account all objectives and characteristics of the fund as described in its prospectus, or in the information which is to be disclosed to investors in accordance with applicable regulations.

Source: Credit Suisse, otherwise specified.
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