The benefits of investing with ETFs: Simple, cost-effective, transparent and flexible
There are many reasons, why exchange -traded funds (ETFs) are in the center of the investment strategy of many people nowadays. In particular, if you compare their strengths with the investment alternatives. ETFs combine the advantages of a share, which simply can be bought and sold on the stock exchange, with the advantages of a conventional investment funds, as the assets are diversified. The goal of an ETF is the return of an index, such as the S&P500, Dow Jones or any other, to reproduce as closely as possible. So, you know at any time, in what you invest.
The market for ETFs has grown rapidly in the last few years: Currently, over 5 trillion US Dollars are managed in ETFs globally (as of July 2017). Where does this growth come from?
There are good reasons why this ETF are here to stay and further take over volum from actively managed funds or single stock investments.
Advantages of ETFs in short:
- Diversified: simply invest in entire markets
- Cost-effective: low ongoing charges
- Flexible and liquid: can be traded on the stock exchange at any time
- Safe: ETFs are special assets
- Transparent: Investment Strategy is known at any time.
High diversification: Simply invest into a complete market
Entire markets – with ETFs private investors can easily invest today in all investment markets. This leads to a broad distribution of assets and prevents the concentration on too few individual title (concentration risk).
Diversification – with the purchase of an ETF you are investing directly in hundreds or even thousands of securities. This is an easy way to create a highly diversified portfolio of various asset classes.
Wide range of applications – in the United States today there are more than 2500 ETF listed on the stock exchange, so there are many countries, regions, sectors and asset classes to invest. The entire investment universe with ETFs is open!
Low cost: More Return on Investment through Lower Costs
Clear cost structure – the cost structure of ETFs is clear and easy to understand. In addition to the traditional order fees and trading costs there are only low ongoing management costs.
Cheap to run – by abandoning the use of active management the administration fee can be kept very low. No time-consuming analyzes or high trading activity, as they just replicate an Index. The running costs of an ETF needs to be included in the total cost ratio, the so-called Total Expense Ratio (TER). ETFs based on well-known benchmark indices, such as the S&P 500 Index, are already available for less than 0.1 percent per year. ETFs are therefore one of the most cost-effective investment instruments on the market.
No issue premium – in comparison to conventional investment funds, ETFs have no issue premium.
Special offers – the competition among the ETF providers and online brokers is large. Many brokers offer their customers cheap special offers for ETF. In the context of such offerings, the order fees are reduced or eliminated entirely.
Administratively simple – you do not have keep track of large number of shares in order to take care of their taxation and the reinvestment of dividends. The ETF simplifies the process for you. Dividends and coupon payments of the shares in the index are regularly paid to you.
Flexibility and liquidity
Easily tradable – simply buy a share in a cost-effective online broker.
At any time – ETFs can be traded on the stock exchange at any time during the usual opening times. Classic Mutual Fund,s on the other hand, can be traded only once a day.
Easy comparison – Often you can find several ETFs on the same index. You can benefit from the high level of competition and compare costs, risks and returns of different ETFs on a one-to-one base.
Savings plan – many ETFs are available within peridoc saving plans. With promotional offers, you can often even completely invest without order fees and custodian fees. Thus, ETFs are perfect blocks for private pension plans.
Transparency: daily publication of the Fund Components
Daily publication – the traditional investment funds is often associated with greater delay until the actual fund composition is published. ETF, on the other hand, publish the exact composition on a daily basis.
Investment strategy known as accurately as possible – an ETF promises you the return on an index. Since the index is known, also the investment strategy is known at any time.
High security: ETFs are special assets
Special Assets – for the long-term investment success also the safety of the plan is crucial. ETFs are investment funds, legally, as well as special assets. This means that the investor’s money is disconnected from the operating assets of the ETF provider. In the case of a bankruptcy, your assets are not in danger.
No surprises – As an ETF tracks passive index there is no active management necessary. Nasty surprises caused by decisions of managers are thus excluded.
Are ETFs always the right choice?
ETFs are the right choice in most cases, but there are also times when other alternatives should be taken into account:
Cash – if you want to keep cash, it may be better to implement this with a day-to-day money account and not with a money market ETF. This will save you the cost of trading.
Trading – You can also use short-term trading ETFs to speculate. But you should be aware that frequent action increases the costs and thus potentially reduces the return on investment.
Certain ETFs can be very risky – regardless of the asset class, leveraged and short ETFs induce further risks to your portfolio. So you should understand exactly how these products work prior to purchasing them in order to be able to better assess their development in different market situations.
The illiquidity – While most ETFs are very liquid and tradable good, it is possible that some small or very rare special ETFs are illiquid. This can result in a larger bid/ask spread. In this case, a corresponding active investment fund could be a better alternative.
No Outperformance possible – ETFs aim to replicate the index exactly. It is therefore possible that the development of an active fund could be better in some cases, but, numerous studies have shown that only few managers beat their benchmark index over the long term.
The decisive advantage
The rising popularity of ETFs is no coincidence. Most retail investors will find that an ETF portfolio covers almost all needs, whether you want to generate weath or current income from your portfolio.
We offer strategy and portfolio templates as a starting point for building your own ETF portfolio.