Advantages of ETFs

What advantages do ETFs offer?

ETFs already have some advantages to offer compared to normal stock trading. These ETF advantages include in any case: risk diversification, security and transparency.

Especially as a private investor with little knowledge about the stock market and stock trading, ETFs (Exchange-Traded Funds) can be the optimal and simple investment. In this article, I therefore try to explain the topic of ETF in my own words and also address fundamental questions. Such as:

What does the abbreviation ETFs stand for? What are the risks of ETFs? How to invest in ETFs? ETFs as a savings plan or a one-time investment? Which ETF to choose?

ETF Advantage Costs

In order to be able to invest money on the stock exchange, different costs or fees may be incurred depending on the product. And it is precisely on the subject of costs that the first advantage of an ETF comes to light. The costs for ETs are in most cases very low. Depending on the broker (provider), it may even be that the offered ETFs are even free for the private investor. For myself, this is already an advantage not to be underestimated compared to other securities trading. Here can be invested easily even with smaller sums and the fees do not “eat up” the little equity.

In addition, most ETFs do not have any additional issue surcharges, which can also save a lot of money. With some products the issue surcharge can amount to already times five per cent by fund or bank and this strikes straight at the beginning tidy purely. An eye should also be thrown on the transaction costs. Also here simply the different offerers compare. There are currently providers in the market where, for example, ETFs can be purchased completely free of charge by monthly savings plan. This is particularly interesting for very young private investors. Here, there is usually no larger investment sum available and so money can be easily invested and increased for old age at an early stage.

ETF Advantage Liquidity

Liquidity is very important when trading securities. Especially when it comes to selling, ETFs have a clear advantage over normal investment funds. Since ETFs are traded on the stock exchange, selling is much easier and, above all, faster. With a normal investment fund, the shares do not go to the stock exchange, but are returned to the actual fund company. This may take some time until the money is actually paid out.

ETF Advantage Safety

The word security must not be misunderstood here in the first place. Because also with ETFs it can come to price losses and also own money can be lost with it. By “ETF security” I mean something different here. The shares in ETFs are so-called special assets in Germany. So if the selected broker should file for insolvency, these shares are not lost! In such a case the ETF shares can be moved to a new broker. These shares still belong to you.

ETF advantage of risk diversification

Again and again one can read and hear that one’s own risk should be broadly spread on the stock exchange. This diversification of the investment risk can be implemented very well with an ETF. Of course, not all available ETFs come into question and the selection should be well considered. If you choose an ETF that tracks the MSCI World, you have spread your investment risk very widely. Here are then more than 1,500 shares from different industries and countries included. So if you don’t really want to deal with individual stocks, ETFs are just right for you to build up assets over the long term.

ETF advantage little equity

As already mentioned, ETFs are probably also the first choice if you do not have much money at your disposal. Depending on the provider, ETFs can even be saved free of charge. For example, a monthly savings plan can be set up, usually starting at 25 euros per month. Depending on later income, the ETF savings rate can then be increased further. Anyone who invests here for the long term (i.e. 20 to 30 years) can thus easily build up a small fortune with little effort and knowledge.

ETF investment: It’s that easy

Setting up a securities account: Before you can get started, you need your own securities account, even as a private investor. What this is exactly, I have already described in more detail under “This is a depot“. Attention: Here the service and the fees compare exactly.

Select ETFs: especially as an equity beginner, spread the risk and find the right ETF for you. For me, for example, the MSCI World, the MSCI All Countries World (MSCI ACWI) or the FTSE All-World Index is a good start. Here are shares from hundreds of companies, industries and regions in it, which spread the risk very broadly. However, I would also like to make it clear here that price losses can also occur with this. So there is no guarantee of profits here either.

One-time investment or savings plan: If the right ETFs have been searched for and selected for yourself, it then comes to the question: Savings plan or one-time investment? I myself would recommend a combination of both. Open the ETF here possibly with a one-time investment and then save regularly with a savings plan. It is best to choose an ETF that automatically reinvests the dividends. Thus, a one-time sum at the start has the advantage that this reinvestment is already larger at the beginning and by the fixed savings plan is always increasing. For this also read my article on the subject of “compound interest effect” times.

ETF payout: An ETF is particularly worthwhile if the investment phase has been held for a very long time. We are talking about 20, 30 or even 40 years. Through the savings plan and the automatic reinvestment (compound interest effect), it is easy to build up a small fortune. Depending on the broker, it is then possible to set a payout plan later. In this case, not all shares are sold at once, but rather piece by piece. As a retiree, this is a good way to supplement your own pension each month.

Selecting the right ETF

Let us now turn to the points or criteria according to which an ETF can or should be selected. In the following, I will therefore try to describe which points should be considered when selecting ETFs.

Mapped index

An ETF is not active, but passive. An ETF tracks an index. Therefore, the mapped index of the ETF plays a decisive role. Depending on your own investment goal, it may need a different index. I myself would recommend to use only broadly diversified ETFs in the beginning and to avoid special strategy indices. These special indices may then only track certain industries or even countries and can therefore represent a higher investment risk.

Folgende ETFs könnten hier interessant sein:

Eurozone: Stoxx 50 oder besser Euro Stoxx 600
US: S&P 500, MSCI USA oder MSCI North America
World: MSCI World oder MSCI All Country World Index
Schwellenländer: MSCI Emerging Markets

ETF Costs

Most ETFs are very low cost, making them very suitable for young private investors. Depending on the provider, investments in ETFs are even free of charge. This makes savings plans particularly worthwhile, as the entire savings installment is then put into the selected ETF, making a monthly savings installment of just 25 euros well worthwhile.

Use dividends

Some companies do pay dividends to shareholders. Here, private investors should look at the actual use of earnings.

A distinction is made here between: distributing or accumulating.

ETF distributing: The dividends are distributed directly to the shareholder in such an ETF. The number of distributions varies depending on the selected ETF and can vary between monthly, quarterly or annually. Here it is important to note that taxes are then incurred on these profits accordingly.

ETF accumulating: With these ETFs, the dividends are not paid out directly to the shareholder, but reinvested directly in the respective ETF. This way, the compound interest effect comes into play very well.

ETF volume

The actual fund volume should also be considered. Especially as a beginner, the fund volume should not be too small. Here it can be said: the higher the fund volume, the better. So here the ETF not too exotic and specific select and above all think long-term.

What are ETFs?