What is an ETF?

This article forms part of the investing basics series from InvestingHero.ch

An exchange traded fund (ETF) is a collection of securities, such as stocks and bonds, that you can buy directly through a broker.

The ETF will typically track an underlying index, such as the Swiss Market Index (SMI) or the S&P500 (the top 500 US companies), and is an extremely cheap and easy way to start investing.

They are very much a mainstream ‘enabler’ to start investing, and used almost exclusively with the various robo advisors in Switzlerand. You’ll most likely be investing in ETFs when you start out.

Benefits of ETFs

Some of the benefits of ETFs include low expense ratios (as in 0.03% type low) due in part to not being actively managed and having the brokerage handle all the client facing costs.

They are also very flexible, and can be traded throughout the day. This enables you to see updated prices in real time, giving you the option to open or close positions instantly.

ETFs also enable you to diversify your portfolio and manage risk by covering different markets, segments and securities with ease through hundreds of existing and established ETFs.

You can be invested in thousands of companies with a single ETF and a few mouse clicks — the simplicity is a huge win.

What is the difference between ETF and mutual fund?

While they contain a lot of similarities, there are a few key differences in the ETF vs mutual fund debate.

For example, ETFs can be traded much faster like stocks, while mutal funds are more restricted to daily trading and having the price value issued at the end of the day.

The costs are also a major difference — ETFs are extremely good value compared to mutal funds.

Mutal funds are typically ‘actively managed’ which means the fund manager, and their team, are working to beat the market and generate stronger returns than the benchmark. This activity and extra overhead will incur extra costs in the form of transaction and commission fees, which in some cases adds up to a substantial difference vs the off the shelf vanilla ETF index tracker.

» Related reading: 8 Common Investing Mistakes to Avoid

And the difference between ETF and an index fund? The ETF will be tracking the underlying index fund, it isn’t responsible for the management of the index fund itself.

ETF Examples

You can’t write about ETFs without mentioning Vanguard index funds. Vanguard has over $5.3 trillion USD assets under management, with some of the most popular index funds responsible for billions of dollars of the world’s wealth.

Some of the more popular, and arguably the best ETFs to buy (based index funds) include:

• The Vanguard Total US Stock Market (VTI),
• Vanguard S&P 500 ETF (VOO),
• Vanguard All World Stock Market (VT)

A number of bond ETF Vanguard options also exist, such as the BNDW which operates in the same way as the stock versions above, but contains US and global bonds.

What are the best performing ETFs?

In terms of performance it really depends on your investing horizon, however long term, its hard to go wrong with some of the flagship ETFs based on the index funds from Vanguard mentioned above, iShares or MSCI.

These are your regular ‘run of the mill’ ETF index funds. You won’t see returns in the high double digits, but you’ll benefit from an established, extremely cheap and globally diversified portfolio that will grow in the long term.

While it’s fun to look at what is working with a short-term timeframe, be very wary of jumping onto an ETF because it makes a ‘Top 10 ETFs for 2020’ list on Forbes or CNBC based on a strong YTD performance.

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