What are ETFs?
Exchange Traded Funds (ETFs) are very similar to index funds. They allow you to invest in a simple and diversified way, just like an index. ETFs can track anything, some ETF focus on specific investment types, others focus on industries, others focus on markets. Here are some popular segments that ETFs can track:
- High dividend yielding stocks
- High capital companies (Similar to S&P500)
- Industry focused
- Bonds
- Commodity based
- Currency focused
- Broad market exposure
ETFs follow (track) an index, hence the name trackers. The objective of an ETF is to offer investors the same return as the underlying market (the index). For example, if an index rises by 7%, the ETF on this index should deliver more or less the same return. This also applies if the index falls.
Diversification through ETFs
With an ETF, you can easily buy an investment that would otherwise require more effort. For example, it is not easy to buy the shares of Europe’s 50 largest companies in one go. But with an ETF on the Euro STOXX 50 Index, you can take a position in the entire index in a single transaction.
The difference between ETFs and mutual funds (including index funds)
The management fees of ETFs are generally lower than the fees of mutual funds. On the other hand, mutual funds do their best to more than make up for their costs and provide higher returns than the index. The approach with an ETF is different: it will follow the index as closely as possible, but usually cannot beat it. This is because the costs of tracking (‘replicating’) the index are incurred. These costs are deducted from the result.
Investment funds are usually traded once a day. The issuer of the fund then ensures that investors can enter or exit the fund at a price based on the actual value of the investments (the settlement price). This is a distinctive difference from ETFs. These are namely, just like for example a Philips share, continuously tradable during the stock exchange day. The purchases and sales of ETFs can in fact be executed immediately on the stock exchange. Index funds are also trackers: they follow the return of an index as closely as possible. But unlike ETFs, they take the form of an investment fund. So with one daily entry and exit moment and price.
Investing in ETFs can be attractive if you:
- Like to follow a market or index
- Want to have a good spread when investing in a market or index
- Want to be able to trade at any time during the trading day
- You don’t have the time to visit your trades frequently
How can I invest in ETFs?
You can trade in several 100s of ETFs directly from eToro or from any of the above mentioned brokers. After opening an account, you can start investing immediately. On most trading platforms you pay no transaction costs when you place ETF orders online, however, other costs may apply.
The risks of investing in ETFs
It is important that you understand the risks involved before you start investing in ETFs. Read the risks of this asset class carefully.
What are the advantages of investing in ETFs?
ETFs are, just like investment funds, an ideal investment instrument to start with as a starting investor. With ETFs, you can work on your capital growth in a low-threshold manner. ETFs are transparent, have low management costs and good diversification. For example, buying iShares MSCI World means investing in a single transaction in the MSCI World index, which consists of more than 1,600 stocks of the world’s largest companies. ETFs also offer the chance to invest in sectors and themes that are normally out of reach.
