What Are The Advantages Of Etfs? Transparency, security, risk diversification – ETFs offer several advantages over other forms of investment. We present the most important.
Whether you compare them with actively managed mutual funds or with certificates – investing money with the help of exchange-traded funds (ETFs) offers private investors some remarkable advantages.
1. Low cost
The most significant advantage of ETFs over actively managed mutual funds is also the most important: ETFs cost less. The management fees for actively managed equity funds are usually 1.5 to 2 per cent of the fund’s assets. The prices for ETFs, on the other hand, are generally between 0 and 0.8 per cent of the fund’s assets.
In addition: for many actively managed funds, banks require investors to pay an initial charge. This is due when the fund is purchased and can amount to five per cent of the investment amount or more. With only a couple of exceptions, there are no such sales charges for ETFs. This is also different from conventional, non-exchange-traded index funds: When buying ETFs, only the usual transaction costs on the stock exchange are due. With a cheap custodian bank, these are often less than EUR 10 per order.
Another advantage: actively managed funds are always buying and selling securities. And like other investors, the fund companies have to pay stock exchange fees. This also reduces the returns for investors – in addition to the fees. ETFs, on the other hand, only passively track an index and therefore trade in securities much less often.
The low costs have a direct effect on the wallet of investors: Only a few actively managed investment funds develop better in the long term than the cheap ETFs. For example, the financial economist Mark Carhart examined 1,892 actively managed investment funds for a long-term study. His result: Over the 35 years from 1961 to 1995, 94 per cent of all actively managed funds performed worse than their benchmark index – because they were unable to offset their high-cost burden with an excellent selection of stocks.
In other words: The fact that actively managed funds can generate above-average returns for investors is only an apparent advantage. Most funds cannot keep this promise.
ETFs sell faster than traditional mutual funds – so they can be turned into cash more efficiently. The reason behind that is, ETFs are traded on the stock exchange – constantly. Conventional investment funds, on the other hand, are usually returned to the fund company when they are sold. It can often take a couple of days for the sales proceeds to be credited to your account.
Security with ETFs – that doesn’t mean that there are no price fluctuations. But it says: ETFs enjoy the legal status of a special fund just like conventional investment funds. That means: Your shares are kept separate from the assets of the fund company. And if a fund company should ever go bankrupt, your ETF shares are not affected. This is different, for example, with index certificates or so-called ETCs (Exchange Traded Commodities), which track the performance of commodities. These are legally bonds issued by the issuer (issuer) – and therefore not protected in the event of bankruptcy.
As a rule, investors do not know which securities are contained in an investment fund on a particular day – the fund companies usually only publish this information on a specific date and with some delay. The performance and the underlying securities of a particular stock market index, on the other hand, can be easily understood – by looking at the daily newspaper or an Internet portal.
5. Risk diversification
Actively managed funds are also legally obliged to reduce the investment risk by investing in a relatively large number of different securities. With ETFs, however, the risk diversification is even greater. An ETF on the currency 50 shows the development of all 50 stocks contained, an ETF on the American S&P 500 index even indicates the growth of 500 stocks. And whoever buys an MSCI World ETF even gets the performance of more than 1,500 stocks from all over the world.
Compared to individual stocks, ETFs do even better in terms of risk diversification. If you want to spread your risk appropriately by buying individual stocks, you need at least 50 different values from different regions and industries. Without a lot of money (and knowledge) this is hardly feasible. ETFs offer a simple and inexpensive alternative.
6. Even for small fortunes
Due to the wide spread of risk, ETFs are ideal for smaller assets. If you want, you can build a complete portfolio from just three ETFs – and thus cover the bond asset class as well as the stock markets around the world.