Investments: opportunities and risks of investing in ETFs

Status: 09/07/2022 09:30

ETF savings plans are a new mainstream in investing. They are considered easy, cheap and low risk. But is this investment really suitable for everyone?

Thanks to the ETF: More and more Germans dare to go public and rely on passive index funds. ETFs, short for “exchange-traded funds”, are index funds that are traded on the stock exchange. They replicate an existing stock index. For example DAX: Instead of buying 40 individual shares, simply buy a DAX ETF to take advantage of the price movements of all companies listed on the leading German index. The ETF develops exactly like the DAX as a whole.

There is almost no limit to your distraction. For example, the MSCI World stock market index contains 1,600 shares. This makes it easier for investors to invest across entire markets and take advantage of their growth.

Advantage: Cheap, Low Risk, Flexible

ETFs are relatively cheap. They cost an average of 0.2 to 0.5 percent of fees per year. As they employ a passive strategy and are not actively managed like mutual funds, they do not incur high acquisition or management costs.

Another advantage of ETFs is risk diversification. Individual stocks can lose their value rapidly at any moment: if the company goes bankrupt, the stocks are no longer worth anything. It is different with ETFs because an investor does not invest in a company or product, but in a portfolio of different companies and industries. Usually this is arranged in such a way that a total loss is impossible.

Like individual stocks, ETFs can be traded by investors themselves. ETFs can therefore be bought and sold at any time; money is not frozen for a predetermined period of time. This gives investors the greatest possible flexibility.

Disadvantage: The temptation to gamble

Edda Vogt also sees a major disadvantage in this advantage of a passive form of investment. He has been working in the financial sector for 20 years and is responsible for communication channels of the Frankfurt Stock Exchange. “Simplicity, low cost and transparency – also lead to hyperactivity,” warns Vogt. “There’s a nice phrase like this:” Empty pockets back and forth. ” Beginners usually check to see if they are better than the market. ” If you think the market is falling, the motto is “Then I’ll sell and I can buy again,” says Vogt. In her opinion, this is exactly what never works.

So if an actual passive ETF is used for active trading, it loses its edge. Because even with worldwide diversification, prices have already dropped by as much as 50 percent. While prices were rising again after each crash, the loss phase was sometimes up to 15 years in the past.

Financial blogger Simon Schöbel explains that long-term really means long-term: “Expecting a 10% return on ETFs after a year – that’s unlikely to happen. You should leave them for at least 15 years. ” Investors should therefore definitely see ETFs as a long term investment. If you leave it for at least 15 years, the return – based on historical experience – is around six percent per year.

Unwanted positions in the portfolio

Another important rule of good return: The ETF should be widely diversified in many sectors of the economy in order to be able to quickly compensate for price losses in individual companies. Downside: There are no companies you selected – individual companies cannot be removed from the ETF. So the investor has to accept what a certain fund tells him, says financial expert Vogt.

But with 8,000 different ETFs, there is something for everyone. For example, there are funds that only consider shares in companies that have a particularly good eye for sustainability, environmental or social criteria, for example.

ETF investors have no voting rights

With the right ETF, you own multiple stocks in stocks. But what you don’t get is the right to vote to influence important business decisions. In the case of an ETF, you do not have voting rights, but assign it to the fund company that issues the ETF.

The BlackRock fund society, which manages the majority of ETFs around the world, writes: “At shareholders’ meetings, we exercise voting rights for our clients. Our (…) investment team works closely with BlackRock’s fund managers to ensure that environmental, social and governance considerations are properly taken into account in the investment process. “

Vogt doubts this is being done really conscientiously. However, the financial blogger Schöbel thinks that for most it is not so important: “The common investor looks at this: ‘How can I minimize risk and increase return?’ – Otherwise, single stocks are ultimately a better investment.

Conclusion: If you follow the three rules – i.e. pay attention to low costs, see the ETF as a long term investment of at least 15 years and broadly diversify the fund – you cannot go wrong with an ETF and hope for good returns in the long term.

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