Exchange-Traded Funds (ETFs)

ETFs are generally much cheaper than funds.

Investors have to pay transaction costs when buying or selling as well as custody fees and ongoing fund management costs during the holding period.

• Account costs: Costs for the online account you use to invest in securities and ETFs.

• Transaction costs: Costs for the ETF’s portfolio transactions or for the purchase and sale of ETF shares.
  
  
• Administration fees: ETF providers charge an annual fee to cover their costs for administration, personnel, index-tracking software, licenses and other operating costs. 

Further information on costs associated with individual ETFs can be found, for example, in the key information document (PRIIPs KID). 

One key difference between ETFs and conventional funds is the way they are traded. Conventional funds are usually bought and sold directly via the fund management company or a broker, with fund prices calculated once a day based on their net asset value (NAV). By contrast, ETFs are traded on the stock exchange in the same way as shares, meaning that their prices change constantly throughout the trading day.

ETFs are often referred to as ‘passive’ and funds as ‘active’, but in fact both instruments can be used to implement either passive or active investment strategies. Passive funds and ETFs track a market index, whereas active funds and ETFs aim to outperform a particular benchmark index.

No one ETF is a good fit for every investor. Rather, the choice depends on many individual factors, such as investment objectives and personal risk tolerance.

You will often see the terms ‘accumulating’ and ‘distributing’ in the names of ETFs. Accumulating ETFs reinvest income such as interest and dividends in new securities, while distributing ETFs pay out income to investors.

With accumulating units, the value of your portfolio will rise faster, which also increases the compound interest effect in the long term. Distributing units, on the other hand, are suitable for investors who want a regular income from their investment. 

With ETFs, investors can gain exposure to a great many securities quickly and easily with just one transaction, often at lower costs than they would incur with conventional funds. This allows them to diversify their portfolio without having to buy a large number of individual shares or bonds. ETFs can also be used in savings plans so that you can invest smaller amounts on a regular basis.

However, not every ETF is suitable for every strategy and risk profile. As with any investment, you should check whether a particular ETF fits with your objectives, your risk tolerance and your financial situation before making a decision. To this end, you should research your options carefully and seek professional advice if necessary. An investment adviser can help you find the right ETF for you.