What is an ETF: explanation and overview

What is an ETF: explanation and overview

It seems that for some time now there has been no other topic in the financial market that has received as much attention as exchange-traded index funds. Exchange Traded Funds, as they are called, are abbreviated with the three letters ETF and represent funds that replicate the performance of stock market indices – for example, the German share index (DAX) or the Standard & Poors 500 (S&P 500).

ETFs make it possible for every private investor to take charge of his or her own investments and asset accumulation. With an online custody account, they can easily participate in stock market events and then build up a long-term fortune with their savings.

Traditional financial products vs. ETFsBecause call money accounts, savings books or time deposits are no longer recommendable financial products. The low or zero interest rate policy of the European Central Bank (ECB for short) has made precisely those traditional savings products that were still recommended by bank advisors a few years ago absolutely useless.

Today, there is simply no way around investing in shares if you are interested in building up assets over the long term. And claiming that shares are dangerous is no longer true these days either. Because with an ETF you can win over even the most safety-oriented saver.

But what do you have to watch out for when choosing this form of investment? Or can you do nothing wrong here? Go to Trustpilot to check it out.

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What are the advantages of ETFs?

An ETF, i.e. an Extrange Traded Fund, is a replica of a stock market index. So in the simplest case, a fund company can take the money of savers like investors and buy all those securities that are in the index. As a rule, these are shares and bonds. The DAX is often used to replicate a stock market index.

The German stock index contains the 30 largest stock corporations in the Federal Republic of Germany – which means that in this case an ETF that tracks a replica of the DAX would buy shares in the 30 stock corporations contained in the DAX. Thus, a 1-to-1 performance against the DAX would inevitably take place.

The goal pursued with an ETF?

One wants to achieve the same return as the index. This means that with an ETF you don’t want to do better than the market, but you want to do just as well as the market. In addition, one must not forget that several times a year it is checked which shares end up in an index.

A new composition of the index also means that the ETF is readjusted. So if there is a swap of a company in the DAX, the change is also made in the ETF.

The cost structure is also particularly interesting. An ETF costs significantly less than a classic fund, where the fund manager specifically looks for shares in the background. If one decides in favour of the ETF, there are no commission payments for purchases, nor are there any ongoing costs.

In the end, more of the profit remains, because the investment fees naturally reduce the return. If we compare the passive index fund with an actively managed equity fund, it quickly becomes apparent that there are serious differences: