You’ve probably heard of ETFs or read about them somewhere. That’s not a coincidence! ETFs are among the most successful financial products of the last thirty years. Around 10 trillion US dollars are currently invested in these vehicles worldwide, so it’s worth having a closer look at these all-rounders.
ETF stands for «exchange-traded fund». Think of an ETF as a shopping basket. Instead of buying individual apples, pears or oranges (which would correspond to buying individual equities), with an ETF, you buy an entire basket of fruit in one go. But the clever part is that this basket doesn’t just contain any old fruits. Instead, it contains precisely the right fruits in the right quantity to represent a specific fruit index. In the same way, the providers of ETFs don’t buy individual equities indiscriminately. Instead, they replicate a specific securities index, for example a stock index.
But what actually is an index? An index such as the SMI in Switzerland or the S&P 500 in the USA tracks the overall performance of a specific group of shares. It is a benchmark for the market or for a particular sector. An ETF simply mirrors the price of this index 1:1.
So if you invest in an ETF that tracks the SMI, you are effectively investing in all the companies listed in the SMI – via a single security!

Why are ETFs so popular?

  • Simplicity: Instead of looking at individual companies, you can invest in an entire market (Swiss equities, US equities, emerging markets, etc.) or sector (technology, healthcare, etc.) with a single ETF.
  • Cost: ETFs often have lower fees compared to actively managed funds. Remember, fees nibble away at your profits!
  • Flexibility: They can be bought and sold like normal shares at any time during stock exchange trading hours.
  • Diversification: With a single investment, you can broadly diversify your portfolio and thus minimise your risk compared to buying individual equities.
  • Transparency: You always know what you are invested in, because the composition of an index is public knowledge and follows a clear set of rules.
  • Security: The shell of an ETF is a fund structure. Fund structures are strictly regulated and are spun off from a bank, they do not appear on its balance sheet. This means that if the provider of an ETF goes bankrupt, the investors’ money is protected because it has the status of a special fund.

What happens to dividends or other income?

If the companies in the ETF pay dividends, these sums are collected and either distributed to the investors or reinvested. This depends on the type of ETF, which may be distributing or accumulating. With accumulating ETFs, you can sit back and relax – all income is automatically reinvested in the ETF. Once again, the compound interest effect plays an important role here and will ensure that your capital will achieve stronger growth in the long run.

Are ETFs the right choice for you?

If you are thinking about getting into investing and don’t want to spend a lot of time researching individual companies or sectors, then ETFs could be a good choice. ETFs are also worth considering if you simply want to make long-term provisions for your retirement without having to worry about checking the stock market every day.

Tips on getting started

  1. Research: Before you start, learn about the different ETFs. Which index do you want? Global? Just Europe? Or specific sectors?
  2. Consider the costs: Look out for the annual management fees (TER) and any buying or selling charges.
  3. Focus on regular investments: Consider whether a savings plan makes sense for you. This entails investing a fixed amount each month – you can start with small sums.