ETFs: benefits and characteristics

ETFs at a glance

An ETF reflects the performance of the underlying index  An index is a basket of various securities selected according to particular criteria. It reflects the performance of this selection’s prices and documents them. An index also serves as a comparative value. – for example, the SMI. In contrast to traditional index funds, ETFs  An exchange traded fund (ETF) is usually managed passively. This means it tracks the performance of a pre-defined index, such as the SMI. Like shares, ETFs can be traded on the stock exchange. are traded on the stock exchange A stock exchange is a market organized according to certain rules – it’s a place where supply and demand meet. There are, for example, stock exchanges for securities, metals and other raw materials. The most well-known stock exchanges are those on which securities are traded. In Switzerland, this is the SIX Swiss Exchange.. An ETF does not generally seek to outperform the market either – in complete contrast to traditional funds. An overview of other ETF characteristics:

Low costs

There are no research costs with passively managed ETFs which simply track an index. This is why they are less expensive than actively managed funds. Nor do ETFs incur any additional costs, such as issuing or redemption commission. However, in contrast to funds A fund is a “pot” into which investors put money. This is invested by the fund management based on certain criteria in various securities, for example, shares or bonds. This means broad diversification can be achieved even with a low level of investment. There are various types of funds: if a fund invests in shares, it is called an equity fund. Likewise, real estate funds invest money in property., stamp duties and brokerage fees are charged.

High degree of transparency

ETFs are traded on the stock exchange – this means all stock exchange information required can be accessed transparently at all times. Investors can also view the exact composition of their ETF on a daily basis. The ETF providers publish the updated basket of securities every day. You can also find much of this information about funds. However, all of the information required for ETFs is published on a much more regular basis.

High degree of diversification

By investing in an ETF, you gain access to an entire market with just one transaction. This means you benefit from well-distributed risk and low transaction costs.

High degree of liquidity

In contrast to funds, ETFs can be traded at any time during normal stock market opening hours. This gives investors the opportunity to react to market movements quickly. 

Physical versus synthetic

A distinction is made between physical and synthetic ETFs. In the case of physical ETFs, all securities of the underlying index are purchased and weighted in the same way as the relevant stock market barometer. Synthetic ETFs do not track the index directly, but instead through what are known as swap transactions with banks.

Risks

As with other securities, exchange-traded funds are also exposed to general market and exchange rate risks. As ETFs track an index, they perform almost identically to the underlying stock-exchange barometer. If political or social developments have a major impact on the economy and financial markets, this will also affect your ETF. The default risk of the additional third party also comes into play with synthetic ETFs. There are also complex products on the ETF market, such as leveraged ETFs or smart beta ETFs which are less transparent.

ETFs are exciting alternatives to traditional, actively managed funds. They are suitable for any portfolio and ideal for new investors. A vast range of products exists.