Updated: 06.06.2022
An ETF (Exchange Traded Fund) or ETF Indexfonds is an exchange-traded fund that replicates the composition and development of a securities index . The ATX (Austrian Traded Index) and the DAX (German Stock Index) are the most well-known stock indices in Austria and Germany. Their ETFs contain the largest listed companies in Austria and Germany, regardless of their industry.
In addition to shares , ETFs can also consist of other asset classes such as bonds, real estate or commodities . With ETFs from different asset classes, savers can diversify their investment across industries and regions around the world and at the same time reduce their investment risk ( diversification ). In addition, ETFs are particularly protected in the event of bank or online broker insolvency due to their legal status as special assets.
Long -term investment (buy & hold) with index funds is also referred to as passive investing . By being linked to an index, ETFs do not require expensive fund management , which tries to outperform the return on the benchmark index through active trading in classic investment funds . Scientific studies have shown that over 90% of active traders achieve a lower end capital than passive investors who rely on ETFs in the long term.
Interested parties can make provisions particularly easily with an ETF savings plan or a robo-advisor . The saver does not have to trade on the stock exchange himself, but only decide whether to save a smaller amount on a regular basis (e.g. monthly) or invest a larger amount on a one-off basis. Alternatively, experienced investors can, of course, also buy and sell ETFs on the stock exchange at any time and without a time limit.
ETF index funds offer savers the opportunity to invest inexpensively, widely and easily . They are therefore ideally suited as building blocks for long-term investments and private retirement provision. With our ETF savings plan calculator , investors can see why an ETF savings plan makes sense, especially for young investors . You benefit particularly strongly from the compound interest effect because the savings plan can run for many years until the money is needed.
The first ETFs have been on the market in the USA since the 1970s . In the beginning, large investors such as pension funds and insurance companies in particular used index funds to offer their price-conscious customers tailor-made investments. Trading in index funds has been possible in Europe since the year 2000. However, even today, ETFs are almost exclusively advertised on the Internet or recommended by fee-based consultants.
The reason for this is that financial advisors and bank advisors who receive a commission for the sale of classic funds are still not interested in offering their customers ETFs because the ETF providers do not pay any brokerage fees. However, more and more media are reporting on the advantages of index funds. Consumer centers are now also recommending ETFs as an alternative to expensive traditional funds.
Although commission-oriented financial advisors do not actively market ETF index funds, assets under management in Europe grew to over EUR 1000 billion between 2005 and 2020 . ETFs are therefore a good opportunity for savers to build up wealth over the long term.
According to a long-term study by Mark Carhart from 1997, more than 90% of classic funds underperform their benchmark over a longer period of time . This is due in particular to the high transaction and management costs of classic funds in contrast to the cost-effective alternative of index funds.
Some online brokers now offer the purchase of ETFs free of charge, while the purchase of a classic fund often incurs a one-time brokerage fee ( issue surcharge ) of up to 5% of the investment amount. In rare cases, classic funds still charge a redemption fee of up to 5% if the investor wants to return his shares to the fund company.
The ETF is also superior to traditional funds when it comes to annual management fees . The classic competition charges up to 2.5% annually for administration. For an ETF, they are often only a maximum of 0.5%. With ETFs and classic funds, these fees are deducted directly from the fund's increase in value and are not billed separately to the investor.
In the event that a classic fund has a better performance than its comparative index ( benchmark ), some of these funds charge an additional profit share of up to 20% . Index funds waive these fees because they only aim to achieve market returns at the lowest possible cost.
By now it should be clear that there is hardly a classic fund that can recoup these costs in the long term through a higher return . The situation with an ETF is completely different. By passively replicating an index , an ETF only achieves the market return , but more of the actual performance is retained due to the lower costs . This circumstance inevitably leads to a higher final capital for the ETF investor .
In the past , investors were always well rewarded for losing control of the stock market if they sat out interim price slumps. Anyone who has invested in a market-wide ETF like the MSCI World for any 15 years in the past few decades has never made a loss - regardless of the time of entry.
In addition, by purchasing an ETF, a saver acquires a share in an investment fund . As a subtype of investment funds, ETFs are special assets that have special legal protection. This means that owners can rely on clear rules and procedures in the event that a fund company, bank, robo-advisor or online broker files for bankruptcy.
However , like all stock market investments, ETFs are also subject to unavoidable price fluctuations . If you need your money in the short term, you should rather invest in overnight money. Due to the current level of interest rates, however, a remarkable increase in value for this form of investment is not really realistic.
If a provider buys the securities contained in the index one-to-one , this is referred to as a physically replicating ETF. This term is also used when an index fund does not actually contain all securities, but only an optimized sampling .
Instead of buying the securities in the index one-to-one, a provider can also have another party (eg a bank) assure the desired performance through a swap . In this case one speaks of a synthetically replicating ETF.
One speaks of a distributing index fund when the dividends of the index companies are distributed to the owners of the fund shares. Most providers usually pay out annually or quarterly.
If the provider automatically reinvests the dividends in the fund assets , this is referred to as a reinvesting or accumulating ETF. Through the direct reinvestment, the saver can possibly benefit from a tax deferral effect.