What is an ETF?
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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.
What did that same fund do in 2018? Specifically, December 17th 2018? Or how about in the first 3 years it started? How does the backtest look way back, to like, 2008?
Not so great I bet.
Take for example the iShares Global Clean Energy UCITS ETF, which has returned a whopping 32.4% so far this year (as of August 19th) but a look in the historic data shows a 9% overall negative return had you invested 5 years ago when the fund started.
And the top performing ETF of 2019 so far?
The UBS Solactive Global Pure Gold Miners UCITS ETF – bringing in a huge 47% YTD.
Amazing right?
But then look at the past performance:
2013 (-50%!)
2014 (-5%),
2015 (-25%)
2016 (+60%, wtf?)
…It’s important to put these YTD figures into perspective. Could you have stomached losing 75% of your investment after the first 3 years, and staying the course with this volatility into 2019?
And speaking of volatility – how about an ETF Bitcoin?
Not yet. The US regulator SEC continues to delay and reject applications for dedicated Bitcoin ETFs. However, watch this space. The noise and backing for crypto based ETFs is only set to get louder and we’ll no doubt see them emerging soon, once the SEC works out what cryptocurrency actually is.
Outside of the mainstream ETFs choose wisely when searching out what’s best for you, not only in terms of performance, but also the size of the fund (small ones risk getting closed) and total fees.
Consider first trying a robo advisor to come up with some recommendations based on your risk profile and investment horizon, before fine tuning and developing further.
Looking to learn more about how you could free up over 250K CHF in the next 10 years? Check out the blog post to read more and start planning your budget today.
