What is an ETF?
Exchange-traded funds (ETFs) are investment funds that passively track the performance of a stock market index such as the SMI. They are therefore also referred to as index funds. An ETF gives access to a broad portfolio of equities, bonds or other asset classes such as commodities.
Unlike actively managed investment funds, they are much cheaper. Since ETFs are traded on stock exchanges like shares, they also offer liquidity on a daily basis.
How do you compare different ETFs?
There are several factors to consider when making investment decisions between ETFs. We have therefore summarized the biggest difficulties in selecting ETFs in a blog article. The four most important criteria can be summarized as follows:
- Liquidity
- tracking error
- expenses
- Replication method (synthetic vs. physically replicating ETFs)
At eCAPITAL, we explain to our clients how we select the best ETFs from a universe of more than 1,000 ETFs traded on the Swiss Exchange. We also constantly check whether it is worthwhile for our clients to replace an existing ETF with another and implement the corresponding reallocations directly for them.
The reasons for the success of ETFs
The rapid increase in global ETF volumes can be attributed to three key benefits:
- Index replication gives investors easy access to a diversified portfolio and the returns of the market index.
- Lower costs than actively managed funds.
- The meanwhile high liquidity enables a rapid entry and exit from the market at low bid-ask spreads, which in turn further reduces costs.
How big is the global ETF industry?
At the end of 2018, global assets under management in ETFs amounted to USD 4,685 trillion.
Which are the largest ETF issuers?
As the popularity of ETFs has increased massively in recent years, the number of ETF issuers has increased significantly. The five largest ETF issuers worldwide are currently Blackrock, Vanguard, State Street Global Advisors, Invesco PowerShares and Charles Schwab (as of August 2018).
What is the difference between index funds and ETFs?
The main difference lies in exchange trading. With a passively managed index fund, a price is determined only once a day. All purchases and sales are then settled at this price. On the other hand, investors can track the price of an exchange-traded ETF in real time and react to it depending on the price development.
What are the costs of ETFs?
Investors should be aware of transaction costs when buying and selling ETFs. This includes brokerage fees as ETFs are traded on the stock exchange. In addition, the liquidity of an ETF has a significant impact on the bid-ask spread (the difference between the purchase and sale price of a security); another cost factor to consider.
In addition to the cost of buying and selling an ETF, ETF issuers charge an annual ETF management fee. These fees are lower than actively managed funds and continue to fall. A range of 0.03 to 0.7 per cent per annum is common, depending on the asset class and the ETF provider.