ETF stands for „Exchange Traded Fund“. ETFs are index funds, which means they replicate the composition of an index 1:1. If the index rises, the value of the ETF also rises; if the index falls, the value of the ETF also falls. ETFs are managed purely passively. This means that the management does not actively try to beat the market, but simply tracks it.
The aim of an ETF is to generate the market performance minus the fund fees.
ETFs are now available for almost all asset classes:
Equities, commodities, bonds, money market, derivatives.
In addition, there are ETFs that pursue certain strategies, bet on falling prices or specialise in certain sectors and regions. Especially in the case of strategy ETFs and short ETFs (betting on falling prices), the question arises: Is this still passive or is a strategy already being actively pursued here? But other ETFs should also be treated with caution. The ETF boom of the last few years has produced some strange blossoms.
There are ETF Websites like IndexUniverse and read more about ETFs and follow for more:
Since when have ETFs existed?
The idea of an exchange-traded fund was born in the USA in the early 1970s. But it took until 1993 for the first ETF to be approved. The „Standard & Poor’s Depositary Receipt“ (SPDR for short, colloquially known as Spider), was launched on the market by the asset management company State Street Global Advisors and was a complete success. This success encouraged other providers to also launch ETFs, first in the USA and since 2000 also in Europe. In the last 14 years, ETFs have multiplied like the proverbial rabbits. Every provider wants a piece of the pie and throws the umpteenth me-too fund or a dubious niche ETF onto the market. Meanwhile, comparison platforms on the internet list almost 1,000 ETFs. Nobody needs them!
For you as an investor, this means: take a close look, study the small print and don’t fall for every slogan. ETFs still make you rich, you just have to choose the right ones. More on this later.
What distinguishes an ETF from a „normal“ fund?
Classically, you buy and sell fund shares from the fund company that also manages them. Once a day, the company creates a buying and a selling price. Investors can buy or sell new shares at these prices. Investors either buy directly from the fund company or process the transaction through a third party (bank, fund shop, broker). An issue surcharge of up to 5% is often due.
ETFs, on the other hand, are traded on the stock exchange like shares and bonds. You can therefore buy or sell them directly on the stock exchange – without going through an intermediary or the fund company. ETFs have no front-end load. The trading platforms earn money on the so-called spread, the difference between the buying and selling price.
What are the problems with ETFs?
The sore points of an ETF are called replication method, tracking error, tracking difference, securities lending and intransparency.
Replication method – what is that?
First of all, the index is only a theoretical construct, a plan, a „this is how it could be done“. Only replication turns an idea into a saleable product. There are three replication methods: