Why are Exchange Traded Funds everywhere right now?
May 18, 2021
Reading time 2 min.
🌈 A quick taster for you:
ETFs offer a low-cost way to invest
Exchange traded funds recreate an index
On average, the increase in value is greater for ETFs than for other types of funds
🧐 Why do I care?
Do you already know what a fund is? - YES? Very good, then just read on and get to know ETFs. - NO? Then quickly check out our post about it now ... welcome back!
An ETF (Exchange Traded Fund) is a certain form of fund. ETFs offer you the possibility to invest money easily, as with other funds, while limiting the risk of a significant loss.
It must cost something, right? Nothing like this is ever cheap. In this case it is, because no management decides how the money is invested. To understand how this works exactly, read on.
🔍 What exactly is happening here?
An ETF always tracks an index. Indiwhat? I'm out already! No, wait! An index tracks a group of companies
What are some indices? - The DAX, for example, is an index. The 30 largest German companies are represented in this group, including Adidas, Daimler and Siemens. - Then there is, for example, the Dow Jones, which is made up of 30 of the largest US companies. - Another example is the MSCI World Index, which tracks companies from 23 industrialized countries – a total of 1,583 companies worldwide.
An ETF now tries to replicate indices 1 to 1.
Here is an example: A DAX ETF invests in the 30 largest German companies in equal proportions to the DAX itself. If a company drops out of the DAX because it becomes the 31st largest in Germany, the DAX ETF sells shares of this company. Now, a new company has slipped into the DAX, so the DAX ETF must also include shares of the new company.
🤓 What does this mean for me?
Investing in ETFs has several advantages for you! In the financial world you often hear: "Nothing beats the market."
And what does that mean? Looking at the past, indices have performed better on average than funds put together by managers.
How? Can this be explained again? In other funds, a manager decides which companies to include or exclude. However, on average, the increase in value of a fund is greater if they simply follow an index.
What other advantages are there? It is cheaper for you to invest in an ETF. You don't have to pay managers who think about how to invest. An algorithm is simply oriented to the index, which results in lower costs.
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