Exchange-Traded Funds – The Benefits Of ETF-Investing

Reasonable interest on savings has become a constant issue in recent decades. The classic savings book is actually is kept by its owners only out of habit. Actually saved money loses considerable value annually.

Many investors have been and are continuing to look for a reasonable alternative that offers a degree of security but also a return that actually increases the investment. ​Some investors are focusing on speculative forms of investment such as day trading, while others are looking for long-term and more conservative opportunities to invest money.

ETFs are such a form of investment, offering high security while demonstrating continuous value. But what are ETFs actually?

Exchange-traded funds = ETF. ETFs are investment funds that are traded on one or more stock exchanges. This is a remarkable difference to traditional investment funds, whose units are usually sold directly by the issuing fund companies.

This trading of ETFs in the second market, the stock exchange, allows a correspondingly greater diversification due to the larger demand pool and thus a significant reduction in the price per fund share. That's why savings plans can be implemented with ETFs.

ETF | Exchange-traded Funds

ETF | Exchange-traded Funds

A traditional investment fund usually requires a higher deposit and the stocks are only partially suitable for buying and selling, depending on the rules set by the issuer.

Now for the second point.

​What does an ETF consist of?

In theory, a fund can contain everything. For example, it can be a real estate fund consisting of shares in a construction project. The fund may also contain currencies, commodities or specific industries.

The aim of a traditional investment fund is to invest the funds from the fund shares sold in the project and to subsequently benefit from its performance. But this also carries certain risks, which can even amount to the total loss of funds invested.

The first index fund was launched back in 1970

These were even the first funds ever that were tradable on the stock market. It was only later that actively managed funds were added. This is why today a distinction is made between passive ETF index funds and active ETFs.

For the average saver who wants to invest his hard-earned money safely, the passive ETF index fund is the better, because cheaper alternative to the active ETF. A passive ETF index fund does not need activity because it simply simulates the performance of a stock market index. An index, in turn, is a measure that reflects the evolution of certain prices.

​The Dow Jones and the NASDAQ, for example, are very well-known stock indices, but they are also available for example for commodities, real estate or pensions. Depending on this, an ETF index fund approximates the performance of the Dow Jones, the world's oldest stock index. As the prices of companies listed in the Dow Jones rise, so does the value of the respective ETF fund shares.

​Why not invest directly in the Dow Jones Index?

Because on the one hand higher administrative costs are associated with it as well as risks. ETFs avoid this using certain instruments.

ETFs – as safe as the Bank of England?

Those who decide to settle for an ETF savings plan or invest money in ETFs benefit, among other things, from the fact that the respective investment company must treat these funds or the ETF units as a special fund.

They are not part of the assets of the investment company but are kept separately. In fact, physically too. As a rule, a cooperating bank manages the units and the inflowing balances as special assets.

In this way, this fund will remain untouched, even if the investment company gets into trouble. Today, however, there are also numerous ETFs launched directly by banks and thus protected by deposit insurance.

Are ETFs then stocks?

They are securities traded on the stock exchange, but not stocks in the traditional sense. Rather, most ETFs are characterized by tracking the performance of many companies.

For example, ETFs based on the replica of MSCI World, a world market equity fund that lists 1,600 companies, including heavyweights such as Apple and SAP.

This equity fund had an average annual performance of 38.81% between the year 2000 and 2015, despite two global economic crises during this period, one of them the dot-com bubble and the other the real estate crisis of the year 2007.

Save with ETFs

A savings plan usually is based on putting aside a certain amount of money each month to serve a specific purpose in the near future. In order to accumulate money beyond this input, an investment is being sought that offers an annual rate of return above inflation to offset the loss of purchasing power.

The savings account does not offer that and time deposits or daily allowances are not exactly bigs sellers in terms of interest rates right now.

Passive ETFs, on the other hand, show a general performance that even leaves asset managers behind. In a recent study, passive ETFs outperformed actively managed funds, largely because of the virtually negligible overhead of passive ETFs.

ETF investment plans can be easily realized online today. Important for the choice of the provider is among other things that they do not charge any purchase or stock exchange fees.

The remaining administrative costs then amount to about 0.2% of the monthly savings. At 100 dollars that's just 20 cents.

Now for the choice of the appropriate ETFs to invest money in. Thousands of ETFs are available. There are a number of criteria that can be used for selection, and there is almost nothing that is not available.

First of all, it is possible to select an ETF that does not need swap and securities lending. Both are financial instruments increasing the investment risk very slightly, but also the return. Or an ETF that only considers indices that list exclusively sustainable companies.

The easiest way, of course, is to observe the performance of recent years and then decide for the appropriate ETF. Another criterion should be the savings plans that the selected ETFs are accumulating. This means that the return is reinvested and not distributed.

That's what makes capital grow.

As with a long-term equity investment, the ETF savings plans also see prices rise and fall. But falling prices are no reason to panic, on the contrary.

During this time, additional shares can be purchased cheaply. On average, prices are rising, as the past has proven.

ETF savers should actually only do one thing, keep calm.

The rest is done by the computer.

Daily performances for Exchange Traded Funds can be tracked with Trade Ideas and other great stock​ ​screeners. However, the main purpose of ETFs is not speculation. While there are some ETFs with leverages are available​, long term investors should always go for the standard ETF.

​Exchange-Traded Funds Investing (ETF) | via @DAYTRADINGz

Click to Tweet